Purchasing an apartment is a daunting task. A good way to make the process a little easier is to obtain a pre-approval from a mortgage lender. A pre-approval or a Good Faith Estimate is a document stating that you are a desirable candidate for a mortgage loan and shows approximately how much you are approved to spend on a home based on your financials.
This process can take 7-14 business days, so be patient! Here are three ways you can ensure your pre-approval:
1. Check your credit score
The first and most important thing to do is get your FICO credit score. FICO is comprised of all three credit reporting agencies and is the one that banks look at. You don’t want to be surprised by your score when it is obtained by the lender.
Once you have a complete report, scan it for errors. Most people find at least a few inaccuracies due to companies not correctly reporting the status of your accounts.
For example, if you paid off a credit card and the company never listed it as closed, it would affect your debt-to-income ratio. Your debt to income ratio needs to be below 43 percent to be pre-approved by most lenders (though a co-op board may be more stringent).
Make sure there is nothing flagged as past due on your report and guarantee that all of the listed accounts are active. Fixing errors like these can bring your credit score up significantly with little effort.
You can ensure the lowest rates when your credit score is 740 and above.
2. Demonstrate Stability
Once you contact a lender and begin discussing the pre-approval process, you now want to show them that you’re serious about purchasing. Let your documents speak for you and bring W-2 statements and tax returns from the last two years, as well as pay stubs, your license, social security number, and proof of non-employment income.
An employment verification letter is crucial. The lender can tell based on your paystubs that you have a job, but they want to know how long you’ve held that job to prove that you are a stable candidate for a mortgage.
3. Bring Proof of Assets
Be prepared to supply bank statements to demonstrate your ability to make a downpayment. You should have 10-20% of what you intend to spend on a home in savings before approaching a lender.
If a family member is going to give you money towards your downpayment, come equipped with a gift letter from them. A gift letter has the giver’s name, address, and phone number in addition to your relationship to them, the dollar amount received and a statement from them that no repayment is expected. This will prove that the money is not a loan and is a valid form of capital for the downpayment and closing costs.
Retirement account statements as well as any pension or alimony you receive are also relevant here. Showing all of your assets will help to prove that you are capable of making mortgage payments.
Next steps
You have 60-90 days to find an apartment and make an offer after being approved, but there are important things to remember during this stage.
Don’t take on other debt during the process. You do not want to co-sign your daughter’s student loans or begin over charging on your credit card at this time. The pre-approval was based on your current financial position. Changing that can void the preapproval altogether.
Another good thing to keep in mind is that getting a pre-approval does not guarantee you a loan. If you’ve found a house, and are ready to make an offer make sure you get an accurate appraisal. If the house you are looking to purchase appraises for less than your offer, the lender will not honor the pre-approved loan amount. They will not lend you more than the house is really worth.
Your best tool in the pre-approval process is preparedness. Repair your credit, have all of your documents ready up front, and be ready to roll with the punches when it comes to purchasing. The pre-approval will help you to be more competitive in the market and ultimately get you the house you desire.
