Mortgage Pre-Approval Requirements
In today's market, buyers need to be preapproved for a mortgage before offering to purchase a property, unless they are paying for it with cash. Preapproval demonstrates the buyer's financial ability to complete the transaction. A seller may choose the preapproved buyer's offer over others, even those at a higher price. For this reason, buyers should familiarize themselves with the most common requirements for preapproval.
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Income Verification
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Lenders will need proof of all income to determine if and how much a buyer can afford for a mortgage payment. Typically, lenders ask for at least the last 30 days of pay stubs to substantiate a borrower's income. Self-employed or commission-based employees will need to provide proof of income for a longer time period since the income is not always consistent. Two years of the most recently filed tax returns, including W-2s and 1099s, are also needed for review.
Assets and Debts
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Borrowers must list the value of all assets owned and debts owed as part of the preapproval process. Assets include things such as real estate, bank and brokerage accounts, retirement plans, vehicles, businesses and other items. All debts must also be disclosed, including credit card balances, loan balances, mortgages and judgments. Assets minus debts equal the borrower's net worth or equity. Income minus debt payments equals the borrower's funds available for a mortgage payment.
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Credit History
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A key factor in the preapproval process is the borrower's credit history check, including FICO scores. The lower the credit score, the higher interest rate a borrower will pay to secure a mortgage. Lenders may also disqualify a borrower from obtaining a mortgage at all if his credit score is below a certain level. Bankruptcies, judgments and other negative items will be disclosed in the credit report. Lenders may order credit reports from one or all credit reporting bureaus.
Preapproval Finalization
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Lenders will take the borrower's income, debt payments, assets, debts and credit report to determine if they are willing to preapprove a mortgage. If so, a maximum mortgage amount will be determined. This preapproval is conditional; meaning it is valid for only a certain time, usually 90 days, and subject to adjustment if the borrower's information changes. Upon preapproval, the buyer can confidently find a home that suits his needs while ensuring affordability.
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References
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