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How to Prequalify for a Mortgage

Buying a home is the all-American dream. It starts with an idea, then saving for the down payment, and finally shopping for the perfect place to call home.

When you prequalify for a mortgage, your house shopping will run smoother, giving you—the future homeowner—some guidelines in regard to how much you can spend. There’s no point in falling in love with a house that you can’t afford. Prequalifying will keep your shopping in the reality zone and eliminate getting in over your head.

To start the prequalification process, it’s necessary to fill out an application with your prospective lender. This application will require names, social security numbers, and addresses for the last two years or more. Your date of birth is also needed as well as your work history. Once the lender has this info, he’ll run a credit check from the three major credit reporting agencies. Your credit score determines the interest rate on the mortgage so the higher the score, the better off you are.
Now, it’s time to gather up a lot of paperwork.

Home Affordable Refinance ProgramTax returns for the last one or two years will be needed. In addition, you’ll be expected to supply copies of W-2s, 1099s, or K1s depending on the source of your income. Recent pay stubs are needed to verify that you’re still working and your average work week pay. If you work on commission, expect to provide more pay information for a longer period of time.

Next, you’ll need a couple of recent bank statements. The lender needs to know the amount of money available to cover the down payment and closing costs. Cash is usually not considered because it could be a gift or borrowed. If it’s a gift then the lender will want to verify that the money really does exist.
Another aspect or prequalifying will be answers to questions such as a different name on accounts. This is a common occurrence if a wedding recently took place. The lender may ask for an explanation of a negative statement on your credit report or why there’s a large deposit at the bank. Don’t be surprised if they ask if you’ve won the lottery!

After turning over all this information, you can anticipate receiving a stack of paperwork from the lender and/or loan officer. Sometimes, the lender and the loan officer aren’t from the same business. This is especially true if you’re using a mortgage broker. If that’s the case, then you’ll receive copies of everything from both.

One of the most important documents you’ll receive is the Good Faith Estimate (GFE). A GFE breaks down the costs and terms of the loan you’ve applied for. Both the loan officer and lender have three business days from the time they receive your application to give you a GFE. Just as the loan officer and lender have investigated you, the GFE provides you with the information needed to investigate them for such things as how many loans they keep or sell. If there are third-party companies involved, the GFE explains who they are and what they’ll be doing. The GFE also confirms your right to a copy of the appraisal.
Most of the time, prequalification does not cost, and can be done online or over the telephone (although eventually you’ll have to take copies of all paperwork to them).

Being able to show a preapproval letter strengthens your position as a buyer, and increases the validity of your offer to the seller.

Taking the time to get prequalified in advance will speed the buying process later on.