7 Tips For A Preapproved Mortgage

By Lisa Scherzer for SmartMoney - Source: www.MSN.com
Having a letter of preapproval can remove a lot of obstacles to homebuying, but the process isn't as simple as it used to be. Preparation and caution are advised.

During the height of the real estate boom, getting a mortgage was as easy as picking out a new coffee table for the living room. Now, homebuyers have to jump through rings of fire before they can sign on the dotted line.

Today, the first step in landing a home loan is obtaining a letter of preapproval. This means a mortgage lender has verified that you're approved for a mortgage of a certain amount over a fixed time frame.

Preapproval letters are prepared even before you've picked out your home. They remove some of the uncertainty in the home buying process. In the current housing market, real estate agents and sellers and builders prefer to work with buyers that have one.

"Before you even get in my car, you want to get preapproved," says Gerry Bourgeois, a real estate broker and president of Towne & Country Realtors in Leominster, Mass.

With a letter in hand, buyers know exactly how much they can borrow -- and therefore how much house they can afford. A preapproval letter shows the seller and the seller's agent that the buyer is capable of buying their house. "For most sellers, the issue is not whether they can get an offer, but whether they can close the deal," says Tara-Nicholle Nelson, a real estate broker in Oakland, Calif.

Agents see preapproved buyers as more serious (and more valuable) because they've taken proactive steps to secure a preapproval. When it's time to make an offer, a preapproved buyer will be in a better position to negotiate.

Here's what homebuyers need to know about the new rules of mortgage preapproval.
Shop around, and shop early: When seeking preapproval, talk to a few mortgage lenders to find the best mortgage package that suits your needs.

Two or three lenders is customary, says Brad Blackwell, a national sales manager at Wells Fargo Home Mortgage in Danville, Calif. More aren't necessary to get a good deal because loan packages are generally very similar and pricing tends to be comparable, he says.

And consult with lenders before you start house-hunting. This way, you'll know how much you can borrow -- and which houses are in your price range, says Ann Stickel, vice president of affiliated services at Michael Saunders and Co., a real estate brokerage in Sarasota, Fla.
Prepare your financial biography: Getting preapproved means a lender must review and verify your income, credit and assets to ensure you could make the necessary monthly payments on a house. In the wake of the housing bust, borrowers must be more forthcoming when it comes to their finances, Stickel says. Your lender should tell you precisely what you need, but be prepared to include:

W2 statements (or 1099 income statements) for the last two years.
Federal tax returns for the last two years.
Bank statements for the last few months.
Recent pay stubs and proof of other income.
Proof of investment income.

Know you're not obligated to one lender: Preapproval doesn't bind you to a particular lender; it's just a promise -- albeit, a conditional one -- that the lender is willing to make the loan. The buyer isn't obligated to borrow from that lender.

Don't expect a rate quote: A preapproval will stipulate the loan amount or monthly payment but not necessarily the loan type or rate. When you apply, lenders use that day's mortgage rates to estimate costs and payments. "Just don't expect them to keep the same rate they preapproved you with as the actual rate that will be available when you find a property and sign a purchase contract," says Danny Valentini, a senior vice president and regional manager at Homeservices Lending, a mortgage lender in San Diego.

Keep an eye on your credit score: Usually, a loan inquiry can ding your credit score. If you applied for a bunch of credit cards within a short period of time, for example, your FICO score might fall. (Most lenders use some version of the FICO score to determine your eligibility for credit and what interest rates and other terms they should extend to you.)
But the credit-scoring models are designed to allow for mortgage loans. The score ignores mortgage, auto and student loan inquiries made during the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping, according to MyFico.com. Also, the score looks at your credit report for mortgage, auto and student loan inquiries more than 30 days old. If it finds some, it counts those inquiries that fall in a typical shopping period as just one inquiry when determining your score.

Deal only with a reputable lender: Sellers now are looking much more closely at who the buyer's lender is. To avoid instances in which the lender might not be able to deliver on the loan, they want to see that any prospective buyer is working with a financially sound and reputable lender, says Blackwell. Most national brokerages and banks have local branches, so buyers should ask their real estate agent (and the buyer's agent who is representing them) or builder for recommendations.

To satisfy any doubts you might have about a particular lender, visit the Better Business Bureau's Web site to find out what kind of reputation they have.

Watch the clock: Preapproval letters -- and the documents they verify -- have expiration dates. Those dates vary by lender, but the letters are typically valid for 90 days, Blackwell says. If you're still house-hunting after, say, 60 days, and you're concerned, ask your lender to revalidate the preapproval letter. Sellers want to be sure the buyer's financial situation hasn't changed since the time the lender initially checked them out.

If any part of your financial picture has changed -- your credit, job status, income or assets, for example -- you should notify the lender so your preapproval can be adjusted.

Step 3: Get Loan Pre approval

10 Steps to Home Ownership

Few people can buy a home for cash. According to the National Association of REALTORS® (NAR), nearly nine out of 10 buyers finance their purchase, which means that virtually all buyers -- especially first-time purchasers -- required a loan.

The real issue with real estate financing is not getting a loan (virtually anyone willing to pay lofty interest rates can find a mortgage). Instead, the idea is to get the loan that's right for you -- the mortgage with the lowest cost and best terms.

REALTORS® routinely suggest that consumers start the mortgage process well before bidding on a home. Many lenders (the sources of money) and programs, for example, are available right here in the finance section of Realtor.com as well as through recommendations from local REALTORS®. By meeting with lenders -- either online or face to face -- and looking at loan options, you will find which programs best meet your needs and how much you can afford.
REALTORS® also recommend pre approvals for another reason: Purchase forms often require buyers to apply for financing within a given time period, in many cases, seven to 10 days. By meeting with loan officers in advance and identifying mortgage programs, it won't be necessary to quickly find a lender, check credit, and rush into a financing decision that may not be the best option.

What is it?
"Pre-approval" means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a pre approval letter, which shows your borrowing power. You can visit as many lenders as you like and get several pre-approvals, but keep in mind that each one carries with it a new credit check, which will show up on future credit reports.

Although not a final loan commitment, the pre approval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.

How do you get pre-approval?
Real estate financing is available from numerous sources, including lenders here in the finance section of Realtor.com, mortgage companies that have worked with local REALTORS® and in some cases, individual REALTORS® themselves. Based on his or her experience, the REALTOR® may suggest one or more lenders with a history of offering competitive programs and delivering promised rates and terms.

The loan officer will carefully review your financial situation, including your credit report and other information. The lender will then suggest programs which most-closely meet your needs. For instance, a first-time buyer may qualify for state-backed mortgage programs with little money down and low interest rates, while a repeat purchaser (someone who has bought a home before) with more equity (money invested in the home) might want to get a 15-year loan and the lower overall interest costs it represents. Typically, first-time buyers opt for the traditional 30-year loan, with either a floating interest rate or a fixed rate of interest over the life of the loan.

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From realtor.com