Home shopping typically starts in a lender's office with a mortgage application and not an open house. Many sellers expect buyers to obtain pre-approval for financing and are commonly willing to negotiate with those who prove that they can obtain a loan.

Key Takeaways of the Blog  5 Things to Know

  • A home seller often asks for a mortgage pre-approval letter before negotiations begin.
  • Pre-approval requires proof of employment, assets, income tax returns, and a qualifying credit score.
  • Mortgage pre-approval letters are typically valid for 60 to 90 days.
  • Upon pre-approval, the lender will provide the maximum loan amount, which helps set a price range for the home shopper.

Continue to read to find out the top 5 things to know about needing to get pre-approved for a mortgage.

Pre-Qualification vs. Pre-Approval

A pre-qualification mortgage can be useful as an estimate of how much someone can afford to spend on a home. A pre-approval, valid for 60-90 days, is more valuable, as it means a lender has checked the buyer's credit, verified assets, and confirmed employment to approve a specific loan amount. Buyers will always benefit from consulting with a lender, obtaining a pre-approval letter, and discussing loan options and budgeting. The lender will provide the maximum loan amount, which will help set the price range for the home shopper.

Requirements for Pre-Approval

Mortgage pre-approval requires a buyer to complete a mortgage application and provide proof of assets, confirmation of income, good credit, employment verification, and important documentation. Pre-approval is based on a handful of things, including:

  • FICO credit score
  • Debt-to-income ratio (DTI)

Some loans can be designed for moderate-income homebuyers or first-time buyers.

1. Proof of Income

Potential homebuyers must provide W-2 wage statements and tax returns from the past two years, current pay stubs that show income and year-to-date income, and proof of additional income sources such as alimony or bonuses.

2. Proof of Assets

A borrower's bank and investment account statements prove that they have funds for a required down payment, closing costs, and cash reserves. The down payment, closing costs, and cash reserves. The down payment, expressed as a percentage of the selling price varies by loan type. Many loans require the buyer to purchase private mortgage insurance (PMI) if 20% of the purchase price is not being put down.

What if you don't have proof of assets? 

This is not uncommon especially since I've been seeing a lot of self-employed buyers lately. Non conventional income sources, such, as self employment, freelance work, commissions or rental properties may not always come with pay stubs or W2s. In cases individuals might rely on bank statements showing deposits to demonstrate their income.

In scenarios where individuals have recently acquired assets through an inheritance or property sale their bank statements may not yet reflect these assets.

Privacy concerns may arise for individuals to disclose all their assets. It's important to acknowledge that lenders require verification of your loan repayment capacity, which includes assessing your assets.

For buyers lacking proof of assets there are loan options available;

"Asset based loans prioritize a borrowers assets like stocks, bonds or investment accounts when qualifying for a mortgage.

No documentation mortgages are becoming less common. May still be offered by some lenders to borrowers, with credit and substantial liquid assets." - Jackie Barikhan, Summit Lending

3. Good Credit

Many lenders will require a FICO score of 620 or higher to approve a conventional loan, or 580 for a Federal Housing Administration loan. Lenders typically reserve the lowest interest rates for customers with a credit score of 760 or higher.

4. Employment Verification

Lenders not only verify employment through a buyer's pay stubs but will likely call the employer to confirm a borrower's employment and salary. Self-employed buyers provide additional information such as the stability of the borrower's income, the location and nature of the business, and the ability of the business to continue generating and distributing sufficient income to enable the borrower to make the payment on the mortgage.

5. Other Documentation

Personal documents and identification required for pre-approval include the borrower's driver's license, SSN, and authorization to allow the lender to pull a credit report.

Pre-Approval vs. Approval

A lender is required to provide a document called a loan estimate within three business days of receiving a completed mortgage application. It will outline the pre-approved loan amount and maximum loan amount, terms, and types of mortgages, interest rates, estimated interest and payments, estimated closing costs, an estimate of property taxes, and homeowner's insurance.

Is it Important to Get Pre-Approved?

Getting pre-approved for a mortgage gives a home buyer bargaining power since they already have mortgage financing and can therefore make a reasonable offer to the seller of a home in which they are interested. Otherwise, the prospective buyer would have to apply for a mortgage before making an offer and potentially lose the opportunity to bid on a home.

The Bottom Line

Mortgage pre-approval is an examination of a home buyer's finances and lenders require five items to ensure borrowers will repay their loan. Potential borrowers complete a mortgage application and provide proof of assets, confirmation of income, credit report, employment verification, and important documentation to obtain pre-approval.

Interested in learning more about getting pre-approved for a mortgage? This guide can be used to get a head start on getting pre-approved for your Palm Beach Gardens mortgage for your home. Explore the best of Palm Beach Gardens today.