Getting Pre-Approved For A Mortgage

You have probably been looking online for several months, and maybe even visited open houses without having a Pre-Approval letter from a mortgage lender. This is very typical.

But when you get close to actually choosing a realtor to work with and seeing homes by private appointment, it is important that you connect with a lender to document your buying power. Unless you are paying all cash, sellers will not take seriously an offer without an attached letter of mortgage pre-approval.

Note there is a big difference between getting “pre-qualified” and “pre-approved” for a loan. Getting pre-qualified can be done in under an hour and only requires you to provide your social security number for a credit check and to verbally state your income, assets and debt. A “pre-qual”, as we call it, does not mean that you can fully execute a transaction. It just gives you a general idea of your “lend-ability” and how much the bank thinks, at this stage, that you can spend.

However, getting pre-approved does put you in a position to execute a transaction because you have provided the lender with required documents such as recent bank statements, pay stubs from your employer, W-2’s or 1099’s from your most recent tax returns, etc.

It may take a couple of days to gather these documents but it so well worth it to get it done because (a) you don’t want to wait until you find a house you love to only then start racing around to pull them together, (b) you may learn too late that you cannot borrow as much as you thought you could, and (c) it is easily the least fun part of this process and it is best to address up front so you can focus on the property search.

Other than dealing with loan documents, the shopping and buying process should be fun. It will likely be the biggest purchase you will ever make so I highly recommend starting with a lender first.

How Much Cash Do You Need?

Most transactions (but not all) have the buyer putting down 20% of the total purchase price in cash deposits and the remaining 80% is loaned out by the bank in the form of a mortgage. So, if you buy a house for $500,000 it is preferred (but not required!) that you put down $100,000. If you have ever heard the phrase “80/20 LTV” - or, Loan to Value - that is what it means. The $100,000 cash deposit means that you have 20% equity in your home.

But, there are different types of loans available that allow you to put down very little. Two examples are FHA or VA loans. Ask your lender about what loan products they have to offer.