What’s the first thing you do when you decide you want to buy a home? My guess is you go to Google and search “homes for sale” in the area you want to buy. Or, maybe you search for local realtors and give the first one you like a call. That might make sense, because that’s who you are going to work with when it comes to finding your new home.
But, here’s something a lot of people don’t know: if you start your home search by talking to a loan officer and getting pre-approved, you will be ahead of the game, realtors will be excited to work with you, and you will increase your chances of getting your offer accepted.
I. Why start with a loan officer?
Here are the two most important reasons:
First, across the state of South Carolina, and most of the nation, we are in what most people call a “seller’s market.” This means that homes are in high demand, and they typically sell quickly, to the first qualified buyer who makes a good offer. In order to be that qualified buyer who comes to the table first with your offer, you need a pre-approval from a lender.
The second, related reason to get a pre-approval as your first step is that when you make that first call to a realtor, there’s a good chance they are going to ask you this question: “have you been pre-approved?” That’s because realtors know the point above, which is that you need to be qualified in order to make that offer.
So, let’s consider two scenarios.
John meets with a realtor, and says he wants to buy a home for $175,000. John’s realtor Jane does great work, and finds a home that fits all of John’s needs, listed for sale at $175,000. Jane sets up a time as soon as possible to show John the home, but John hasn’t called to find out if he can get pre-approved.
Mary, meanwhile, is working with realtor Mike. But, when she met with Mike for the first time, she brought him a pre-approval letter for $175,000. Mike finds the same home for Mary, and she goes and views the home just after John.
Both Mary and John decide offer the $175,000 asking price on the home. But, Mary is able to attach her pre-approval letter to her offer, while John’s offer is subject to an approval from a lender for the necessary financing.
It’s not hard to guess which buyer the seller is going to accept a contract from. They will take the pre-approved buyer who is one step ahead.
II. What is a Pre-Approval?
Now that you understand why a pre-approval is important, let’s talk about what that means. Well, it really means exactly what it says – your loan officer has gathered enough necessary information from you to determine that you can be approved for the loan amount you are seeking. A good loan officer will then confirm that with a letter that states you are pre-approved.
In order to pre-approve you for a loan, your loan officer will generally need four basic categories of information.
1. Credit Report
Your credit report is the first key piece of information in getting you approved for a mortgage loan. Your credit report shows your credit score, as well as your debts/liabilities. Your credit score determines whether you meet minimum credit standards to be qualified for a loan. Then, your monthly payment obligations are compared with your monthly income to determine your debt to income ratio. Your debt to income ratio is used to determine the dollar amount of mortgage for which you can be approved. In order to access your credit report, your mortgage broker will have to collect your birthday, your social security number, and your current address.
Your income is, of course, the other factor for your debt to income ratio. Your monthly income is compared to your monthly payments in order to determine the debt to income ratio. Your loan officer will need to know your current employer, your employer for the past two years, and your current income (hourly pay and number of hours per week/annual salary, etc.). Typically, providing one month of paystubs is the best way to show your income.
Your assets can are typically are money you have in different accounts, such as checking account(s) and savings account(s), 401k, IRA, stocks and bonds, and any other form of money accounts in your name. These assets are important for two reasons. First, they are used to verify that you have money available to make any required down payment and pay your closing costs. Second, they are used to determine that you have the required amount of reserves. Reserves are money that you will still have in your account after making your down payment and paying your closing costs, so that the lender can verify that you are able make a certain number of loan payments. Typically, the higher your credit score, the less reserves you will be required to show.
Your loan officer will likely need two months of bank statements to show your assets. Providing those statements up front is the best way to get this information, but you may be able to provide documentation later, and your approval will simply be conditioned on verifying the stated assets are available.
4. Background or family information
Depending on the loan you are applying for, some other information may be needed. For instance, for USDA loans, your loan officer will need to know how many family members will live in the home with you, and if you have any dependents. Other monthly expenses, like child support, are important to note as well. Your loan officer will go through these miscellaneous items with you prior to getting you pre-approved.
III. What if you don’t qualify?
If you find yourself in a situation where you aren’t quite ready to buy a home, a good loan officer will be able to help tell you what steps you need to take in order to be qualified. Perhaps you need to bump up your credit score a few points, but aren’t sure what the best way to do that would be. Maybe you need to save some more money, but don’t know exactly how much you’ll need to get the loan amount you want. A loan officer is your best resource in helping you work through those issues.
This point is also a great way to tell if the loan officer you talk to is one you want to work with. If the loan officer is not willing to spend some time talking to you about what steps you should take to get qualified, that may be a good sign that you should consider calling around to other loan officers.
The bottom line is this: getting in touch with a loan officer as soon as you are ready to buy a home will put you one step ahead of the game, and will help you get ahead of the curve when it comes to getting your offer accepted on the home that you love. A good loan officer will be thorough in gathering information from you on your first call or meeting, and will be able to get you a pre-approval letter quickly.