As your hunt for finding the perfect property to live in begins, it’s a good idea to take steps with regards to getting pre-approved for a mortgage. In fact, most investors today look at getting a mortgage pre-approval before they even start the process of house hunting.
Why is it recommended? Getting pre-approved for a home loan helps you understand the housing budget that you need to be looking at and also the monthly mortgage payment commitments, which should give you a rough idea of how much you will be required to earn every month.
So, in other words, you can say that the process of getting pre-approved for a home loan should begin right when the thought of buying a home crosses your mind, even before you actually get down to house hunting.
What should you expect when you’re looking for a mortgage pre-approval?
The mortgage pre-approval process isn’t always the smoothest one and the ride can get a lot bumpy for you especially if you do not have a very impressive credit score or credit history. Real estate lenders often look at the following things before they begin the mortgage pre-approval process for your application:
- Credit score to basically check your loan repayment abilities
- Credit history to determine your credit-worthiness
- Debt-to-income ratio
- Loan-To-Value Ratio
- Income history
- Employment history
- Details about your assets and liabilities
Sounds like it’s too much? Well, that’s the reality of how Commercial mortgage pre-approval works. You should typically expect your potential lenders to poke and have a lot of questions for you about your financial life as they want to assure about your repayment abilities.
They need to follow a procedure too in order to pre-approve your commercial mortgage and hence, you will not have to wait for long periods of time in uncertainty.
The government has set a couple of standards for lenders on the time frame by which they are expected to get back to you (this has been discussed in the later part of this blog).
Before we get to answers to – how to get pre-approved for a mortgage, it is important you understand what a mortgage pre-approval does and what are the documents that are needed to be submitted by you for getting your loan pre-approved.
How does the process of mortgage pre-approval work?
How do I get pre-approved for a mortgage? To begin with, you will have to fill out a mortgage application form and submit it to the many lenders you want to finance your loan from.
The two important things you’ll need to fill in are your identifying information and your Social Security number for lenders to pull your credit.
Note that the lenders who are considering to pre-approve your loan will conduct a hard inquiry on your credit which might affect your credit score.
However, the good thing with this option is that should you choose to shop around for the best commercial mortgage rates and wish to apply to a list of lenders – even though there will be multiple lenders running a hard inquiry check on your credit score, it will still be considered as a single inquiry.
Takeaway? It is a good idea to ask around a bunch of lenders instead of limiting your options only to one or two lenders.
Here’s how a typical mortgage application would look like. There will be eight major sections that need to be carefully filled out.
Note that if you’re applying for a loan approval along with your spouse or another co-borrower, you have to provide the information of your spouse and co-borrower too.
Section 1 – The types of mortgage and the terms of the loan
The first thing you’ll need to fill out about is the details pertaining to the type of mortgage you are looking for. With a wide variety of loan options available out there, you may get confused about the right kind of loan that will perfect your commercial real estate financing need.
You can do your research about the best kinds of loans that make a perfect fit for different types of financing needs before filling out this section. (However, note that you can change your loan type preference later too. Besides, you will be asked to fill in the details about the purpose of your loan in another section, so your lender will get a rough idea about the right kind of loan for you). The second part in this section would cover details concerning the terms of the loan – the interest rates, the period of the loan, interest rates, etc.
Section 2 – Borrower information
This section covers the basic information of the borrower. You need to specify the details about your spouse or a co-borrower too in this section if you’re applying for a loan together.
Information like your full name, contact details, Social Security number, years of school attended, marital status, address history, employment history and the details about the number of dependents in the family.
Section 3 – Information about the property and the purpose of the loan
Information regarding the property including the address, year in which the property was constructed, the legal description provided about the property, etc needs to be filled up, providing an outline about the basic information about the property.
Further on, the purpose of the loan needs to be written – that is, whether the loan taken would be applied for the purchase of a property, to refinance an existing loan, or for new construction, which is generally in the way of making repairs and renovations to the property.
Details about the type of residency need to be filled out too – that is, whether the property is for primary use, secondary use or for investment purposes.
Section 4 – Employment information
The next section which needs to be filled out is regarding the employment information of a borrower. The names and contact details of your current employer need to be provided.
If your current employment has been for less than 2 years, you will need to additionally provide the names and contact details of your previous employers. Additionally, you must also specify the job title and monthly income.
This helps lenders to understand your income stability and to determine whether or not you will be able to pay your dues on time.
Section 5 – Your monthly income and the information related to your combined housing expenses
Lenders would be interested to get a clear picture of your total monthly income – The sum total of your base monthly income, your passive income if any, rental income if applicable, dividends and profits if you’ve invested in shares and bonds, bonuses and commissions, and any other types of monthly income that you may be deriving in the form of alimony or child support.
Next step would be to provide details about the combined housing expenses that you typically incur every month such as – rent or loan payments, property taxes, a premium paid on property insurance, and homeowner’s association fees if any.
Section 6 – A detailed account of your assets and liabilities
This section is probably one of the most important sections that decide whether or not a lender will pre-approve your loan.
A detailed account about the assets you own – banks and credit union accounts with current balance amounts, a detailed account on the equity shares and bonds held by you with their corresponding values, insurance, mutual funds investments and their net market values, retirement savings and every other kind of asset that you may be owning.
Additionally, a detailed account of your liabilities including – revolving charge accounts, child support, alimony, student loans, vehicle loans, and any other outstanding debts.
Section 7 – Details of the mortgage pre-approval transaction
This section is often filled out by the lenders after consulting with you as a borrower. The basic details of the mortgage pre-approval transaction like the purchase price, the loan amount, the value of estimated repairs and renovations needed to be done to the property, estimated closing costs, and mortgage insurance values if any.
Section 8 – Other declarations
All other declarations that may contribute to deciding the loan repayment abilities of the borrower need to be filled out in this section. This could cover the details regarding the inventory of any pending judgments, liens, past foreclosures or bankruptcies, pending litigations or lawsuits, and any other corresponding delinquent debts.
Additional to this, you will also be required to state whether or not you are a US permanent resident and whether you intend to use this property as your primary residence.
What are the documents that are needed to be submitted by you for getting your loan pre-approved?
After submitting the pre-approval mortgage application, you will need to submit a couple of documents to verify the details outlined in your application. Here’s the brief list of documents that you will need to gather before your lender provides you a pre-approval on your mortgage and closes your transaction:
- Bank statements related to the past two months
- Paystubs related to the past 30 days
- Income tax returns
- W-2 tax returns related to the previous two years
- Asset account statements like mutual fund statement of disclosures, equity shares statements, retirement savings.
- Driver’s license or a U.S. passport
- Divorce papers and documents (if you are showing child alimony as a monthly income in order to back it up)
- Form 1065 or Schedule K-1 for self-employed borrowers, like freelancing professionals.
- How long is a mortgage pre-approval good for?
Mortgage pre-approval letters are generally valid for a time period of 60 to 90 days. The reason lenders extend an expiration date on these letters is because your credit profile could change if it is open for more than a period of 60 to 90 days.
What happens when you expire a mortgage pre-approval letter? You will need to fill out a fresh mortgage pre-approval application and go through the entire process, all over again.
Conclusion? Ensure that you start house-hunting as soon as you receive the mortgage pre-approval letters from your lenders and try to fund your deals way before the
