Buying a Home? Here’s Your Ultimate Pre-Approved Checklist
By: Kyle Spearin
Getting pre-approved is an essential step towards home ownership. So what exactly is a pre-approval?
It’s basically a letter certifying that a lender will back you on a loan when you make an offer on a house. They figure this out by having you compile your personal finance information along with anyone else’s information who will be on the loan. After reviewing various factors your lender will determine how much of a loan you can take.
By doing this up front, it saves a lot of time down the road to home ownership. Having this letter is proof that you aren’t wasting your time or anyone else’s. Imagine thinking that you could afford a $500,000 house when the reality was that you were only able to get pre-approved for $300,000. How would you feel?
Chances are that you wouldn’t be a happy camper. Your expectations and buying strategy would totally shift. Not to mention, your real estate agent would probably be annoyed which is why you should always do this before going to look at houses in person.
If you’ve never tried to buy a house before, this might seem overwhelming. By following the recommendations below, you will be well-prepared for your next leg of the home buying journey.
What are the Most Common Documents that Lenders Require?
When the time comes to start the pre-approval process, you should have all of your ducks in a row. One way to do that and impress your lender at the same time is to put together a list of documents you need. The items seen below are necessary in most cases.
Once you’ve compiled these documents, save them in a file on your computer. That way, you can easily send it over to your lender rather than scrambling to put everything together. There’s no better indicator that you’re ready to buy a home than being organized and anticipating next steps.
- Driver’s License or other Identification
It should come as no surprise that lenders won’t accept your middle school ID as a valid license. Make sure your identification is up to date and accurate. Also be sure to make a copy of the front and back.
- Pay Stubs
Lenders also want to see that you’re currently employed. They will probably ask for your 2 most recent pay stubs as proof of your income. If you have direct deposit, be sure to reach out to human resources to ensure that they can produce pay stub copies for you.
- W-2 or 1099 Forms
Yet another employment related request. Lenders want to ensure that you have a consistent form of income. As a W-2 employee, expect to produce 2 years of employment in the same field. If you’re considering a career change, it might be wise to wait unless you have someone else on the mortgage that does have consistency in terms of employment.
The same goes for 1099 or self-employed people. Lenders look at this as a riskier form of employment due to the nature of entrepreneurship. A 2 year buffer enables them to gauge your average income over this period of time.
- Outstanding Loans or Debt
Thinking of getting a new car or another big ticket item?
Think again. From the lender’s perspective, this is a risky undertaking. Having a new debt such as a car loan on top of trying to get a mortgage is not a favorable proposition. They view this cautiously as you may have a higher likelihood of defaulting with multiple loans. A lender does not want to get stuck in a situation where you can’t pay them. Just something to be aware of that not many people consider.
In addition, things like credit card debt need to be disclosed. Even another home that isn’t producing income (like a rental) will be counted against you. Debt is a double-edged sword because on one hand it helps you build your credit score, on the other hand it increases your debt-to-income ratio. Ultimately you want to have a ratio in the lower 40% range or below. This varies depending on the loan you end up taking (each has pros and cons), but this is a good rule of thumb.
- Bank Statements and Investments
Just as you will be required to show multiple pay stubs, you will also need to show two or more months of bank statements. This does a few things. One reason they do this is to highlight that you have money for a down payment. In some situations, you can accept gifts to help with this, but a lender would definitely prefer that you show your saving habits. Another reason they look at multiple months is because they want to make sure you didn’t have any big drops in savings that would indicate frivolous spending on your part.
Do you have a 401k? IRA? Robinhood Account? Other investments?
Make sure you print out the details of each of your investments as well. Collectively, bank statements and investments will help increase your net worth and factor into the lender’s ultimate decision.
- Tax Returns
People who work for banks and look at lending on mortgages are pattern finders by nature. By looking at your tax returns, they will be able to see where your main source of income is, any one time bumps in income (home sale for example), and any losses you may have accrued. They will look at 2 years of tax returns to average out your income as a factor for their lending criteria.
- Other Comments
Lenders may request other financial related documents. If you are self-employed, expect them to be more thorough. They might want to see additional information related to your business to prove your income is consistent or on an upward trajectory.
This checklist is intended to get you ready for your pre-approval. By being pre-emptive, you will be ready for anything that comes your way.