Preapproval's a great first step
Before you start looking for a home you approve of, you need to find a lender that approves of you.
Your first step should be to fill out an application that tells all about how much you make, how much you've saved and how much you owe on everything from cars, to school loans to credit cards.
The lender will assess that, check your credit report and scores and reply with a letter saying you've been preapproved and for how much.
That's important because some real estate agents won't even show you a house or condo until you can show them that letter. It tells them that you're a serious shopper with the financial wherewithal to make a deal.
It's also your first chance to see what a bank or mortgage company thinks about you. Getting preapproved can make it quicker and easier to get a loan and close on a house and, in most cases, the process is free.
Don't settle for being "prequalified."
That means the lender took your word for everything and didn't pull your credit history or scores. It doesn't really say very much about your ability to get a loan and sellers consider it to be meaningless.
Here's what you need to do win preapproval:
Step 1. Get your credit reports
You should see what's on your credit reports before you ask a lender to look at them. Those reports and the credit scores calculated from that information -- will play a major part in determining whether you qualify for a loan and how much interest you'll have to pay. (The lower your score, the higher the interest rate.)
You are entitled to a free credit report from each of the three major credit-reporting agencies every year. To get yours, go to www.annualcreditreport.com.
There are three credit-reporting agencies, and since you don't know which one your lender will use, you should check all three. If you are married, you will need your and your spouse's credit reports -- six in all.
Even though the reports will be similar, there can be differences, and each agency will calculate its own credit score for you.
The free credit reports do not include your credit score because the reporting agencies are not required to provide that.
You must buy your score, including a copy of your credit report, by contacting the agencies directly:
- Equifax (800) 685-1111 or www.equifax.com, $15.50
- Experian (888) 397-3742 or www.experian.com, $15.00
- TransUnion (800) 888-4213 or www.transunion.com, $14.95.
Step 2. Correct the mistakes
The credit reporting agencies never check any of the information they're given by credit card companies, utilities or other companies. And since they receive millions of pieces of data every day, lots of mistakes are made.
According to a recent survey by the Government Accounting Office, nearly three quarters of all credit reports contain at least one error.
So check every entry on every report to ensure its accuracy. Then contact the reporting agency to correct any mistakes. Each credit report will tell you how to do this.
You can't ask the reporting agency to remove any legitimate black marks on your credit report, such as missed payments, late payments, repossessions, foreclosures, or bankruptcies.
But a written statement describing how an illness, injury, layoff, or family crisis caused or contributed to a financial crisis can be attached to your credit report.
Step 3. Assemble your paperwork
Use our checklist to gather all the documentation you'll need to apply for a mortgage. Most lenders won't ask to see your pay stubs, credit card bills, bank or retirement plan statements during the preapproval process. But you'll need lots of information from those documents to complete the preapproval application.
Step 4. Pick a lender
Use our database to determine what kind of fixed- or adjustable-rate loan is right for you and to find a lender that offers the best combination of rates and fees for that type of loan.
You don't have to get your loan from the lender that preapproves you. But in many cases, you will. So don't go through the preapproval process with a lender whose rates are unacceptably high, or that you're not comfortable with.
Step 5. Visit your lender and apply
Whether you apply in person or on-line, from a bank or a mortgage company, the information you'll have to provide is pretty much the same. You'll be asked:
- For your street address, e-mail address, phone and Social Security numbers. If you've lived at your current address for less than three years, the lender will want to know where you lived before that. If you are buying this with another person or persons, they'll probably want to know your relationship to the co-borrowers.
- Do you currently rent, own or live with family?
- How many dependents do you have?
- Your annual income.
- Your occupation, employer and how long employed. If you have been with the company for less than two years, it will ask where you worked previously.
- Your assets -- what you own and what it is worth. This includes your current home and other property, checking and savings accounts, stocks, bonds and retirements accounts.
- Your liabilities -- how much you owe, to whom, and how much you pay every month.
- Have you filed bankruptcy in the last 10 years?
- Are you currently behind on any bills?
- Are you a first-time buyer?
- Are you buying a home as a residence or rental property or, in the case of a duplex or other multi-family unit, both?
Step 6. Answer questions, provide documentation
The preapproval process can take less than a day, or more than a month. It all depends on how complicated your life, credit report, finances and records are.
If you've been working for the same company for 10 years, have two paid-for cars and only three credit cards, you might get an answer in less than an hour. If you've had five addresses and four jobs in three years, or are self-employed, or have a long list of credit cards and creditors as well as a number of black marks, expect it to take longer.
You may be asked to clarify or provide additional information by phone, e-mail or traditional mail. That might include a request for W2s, tax returns or other documents.
Step 7. Get approval -- start house hunting
When you're preapproved you'll get a letter from your lender spelling out how much you can borrow. It may also spell out the interest rate and the type of loan you are preapproved for: 30-year conventional, 5-year ARM, and so on.
Take the letter to your real estate agent and start house hunting. Since you and the real estate agent now know the loan limit, there is less danger in falling in love with a house that you cannot afford.
Remember, however, that you are not required to borrow all of the money the lender is willing to loan you. Knowing how much house you can afford is critical for every buyer.
If a real estate agent insists on showing you houses outside of your price range...find another agent.
Preapproval usually comes with a 30- to 90-day time limit. Most lenders will extend the offer if finding a home you want to buy takes longer than that. But they might run another credit check when they extend the approval.
Follow Interest.com on Twitter.