How do you get pre-approved for a new mortgage so you can purchase a new home or investment property? Or refinance your existing property?
Being organized and having your personal finances in order is a great start. It will give you the best chance of getting qualified for a new mortgage.
In this guide, we’ll review the steps required for getting qualified for a pre-approval. We’ll also cover what to expect during the application and approval process. And why you want to work with a mortgage broker.
Do the following before you start applying to any lenders for a loan.
Six Steps To Help You Get Qualified
The order of these steps is not important, just make sure you understand each one and complete it.
1) Current Income & Assets – Get a hold of all your financial records for the current year. The lender will most likely want to see copies of these documents. Gather up your pay stubs, 1099’s, previous year W-2’s, bank statements, investment statements, and any other sources that show a proof of income and the assets you own.
2) Business Income (if applicable) – Be ready to show your tax returns for the previous two years. This is especially the case if you are self-employed or have a lot of cash based income. Other accounting statements will most likely be required as well. Lenders want to see how much monthly income you have and where it’s coming from. The more steady and diversified your stream of income is, the better it will look.
3) Budget – Create a budget for yourself tracking all of your existing monthly expenses. Then consider the additional costs for owning a property such as property taxes, mortgage payment, insurance payments, and home repairs.
4) Debt-To-Income Ratio – Take the time and understand what a Debt-To-Income-Ratio is. You’re going to hear the bankers use this term when you apply for a loan. It sounds more complex then it is. It’s just the total amount of your bills every month including your mortgage payment (or rent) divided by your total gross income. This is the reason why it’s essential to get organized with the previous three steps.
Generally speaking, your debt-to-income ratio should not exceed 33 – 40% of your gross income. That means if you make $6,000 a month, you’re out of pocket expenses don’t cost more than $2,400 per month. For some special loan programs such as FHA loans, it might be as high as 56%.
5) Rental Income – If you’re considering using tenants and roommates to help you pay the monthly expenses for your new property purchase. You can check the going rents on a site like Craigslist to find out what rooms or homes are renting for in the local area.
You can provide that information as additional income with your application to the bank. Each lender views that info differently so don’t stress out about it too much, just a rough estimate is fine. Some banks may or may not consider this extra income, depending on the circumstances.
6) Credit Report – It can’t hurt to take a look at your credit score and credit report. You will want to see if any negative or erroneous items need to be addressed, so there are no surprises that prevent you from qualifying at the last minute. Check out Annual Credit Report for a free copy of your credit report and Credit Karma to get your credit score for free. If you have some credit issues you need to work out; you can review my articles on Credit Scores.
The Application and Approval Process
I remember when I first applied for my first mortgage, the biggest question on my mind was:
Where does all this money come from?
The answer I got was: It comes from bank depositors, private investors, wall street, and programs by the federal government. That’s why there are so many fantastic loan options available for buying property.
But with so many options that are changing all the time how do you possibly keep up?
A mortgage broker or home loan advisor is your best resource for knowing what loan programs are available for your unique situation. Plus, they can walk you through on what to expect during the entire process.
I was recently reading an article written by Jason Wheeler who is a Mortgage Broker here in the SF Bay Area. Check it out: What to Expect During the Home Loan Process?
Mortgage Brokers have a huge advantage for the consumer because they have up to date knowledge on all of the different programs. You tell them what you’re buying and everything else about your plans. Then they help you shop around for the best terms.
The entire process of getting a mortgage for a new property can take 15 to 45 days depending on the circumstances.
The overall funding process looks like this:
1) Submit the requested information to the bank so they can view your complete financial picture. They’ll even pull a credit report.
2) You’ll fill out an official loan application and complete any other forms they require.
3) You’ll get qualified and pre-approved for the loan. If your shopping for a new home they’ll even provide you a pre-approval letter.
4) The property you are buying or refinancing will need an appraisal.
5) The lender will officially approve funding and will require you to sign a big stack of paperwork. Your new loan closes, and your first payment will be due 45-60 days later.
That’s it! The complete home loan application and approval process.
If you’ve followed the steps in this guide exactly then your on your way to getting the perfect loan. Being organized and aware of your own financial situation will make the process as smooth as possible.
There are numerous loan programs out there, and some will require more paperwork than others. In the end, you’ll be ready for anything. To find out more about the options you have for financing, I highly recommend you read my article on Smart Home Loan Options