Once you’ve found a Realtor to help you through the home buying process and you have talked about your monthly budget, Step 3 to buying a home is to get pre-qualification/pre-approved by a mortgage lender. As Realtors, we won’t put an offer in on a home for a client unless he or she has been preapproved. This ensures that our buyers’ offers are looked at seriously and home sellers know that our client has taken the time to figure out the financing of their potential purchase.
Buyers, loan officers, and Real Estate Agents alike get confused about the terms “Pre-qualification” and “Pre-approval”. The HAR (Hawaii Association of Realtors) updated the Standard Purchase Contract in 2019 and clarified for Realtors the difference:
“Aligned language with the mortgage industry post-TRID. Specifically, they don’t do pre-approval letters anymore (even though REALTORS still call it pre-approval). Specificed what Seller and the industry values which are credit review and income verification for the prequalification process.”
In essence a pre-approval is pre-qualification with “credit and income verification”
As mentioned in Step 2 it is important to decide what you can comfortably afford to spend on a home, what your monthly payments will be, what interest rate you qualify for, and how much you’ll be paying each month in taxes, maintenance fees, association fees etc., all the things that will change the monthly payment of any home you are considering to purchase.
Our Hawaii Starts Here Team does not send our buyers to only one lender. We use dozens of lenders and always give our clients options. We understand that some buyers have an existing banking relationship which they want to strengthen through a home loan so if you want to use a local bank that is an option. Along with utilizing a local bank, there are mortgage lenders, and also mortgage brokers. Banks provide other services to clients such as deposit accounts, personal loans, and business loans. Mortgage lenders are banks or financial institutions that specialize in mortgage services. Mortgage brokers are intermediaries that bring buyers and mortgage lenders or banks together, essentially helping you shop around for a certain loan type or the most favorable terms.
Every lender or bank varies in the types of loans they can do, their loan guidelines, and interest rates. Furthermore all banks, lenders, and mortgage brokers have dozens of “Loan Officers” with varying specialties and years of service in the mortgage industry.
Having a good mortgage lender/loan officer is a crucial part of ensuring a smooth and successful transaction. Working with a bad mortgage lender can make the process difficult for everyone involved and put your purchase in jeopardy of not closing on time or at all. You also might end up regretting the lender you chose for years if you end up paying a higher interest rate than you should have or if you were not informed about all of your mortgage options. You could also lose out on your dream property because your mortgage lender was disorganized and couldn’t get you fully approved during underwriting, etc. That’s why it’s important to work with a reputable lender and loan officer.
Each lender and type of loan has slightly different requirements regarding what documentation they need from you for the pre-qualification/pre-approval process, but in general, expect to provide the following items:
• The two most recent months (or a quarterly statement) of any asset or bank account: checking, savings, 401k, mutual funds, individual stock accounts, IRA’s, etc.
• Most recent month of a paystub (1 monthly paystub, 2 bi-monthly paystubs, 5 weekly paystubs)
• Past two year’s worth of W2s or 1099s
• Past two year’s worth of US Federal Tax Returns
• Past two year’s worth of Corporate Tax Returns (Self-Employed)
• Current Year P&L Statement (Self-Employed)
Whichever loan officer you decide to speak with will ask you for general information along you’re your documentation. After speaking with you on the phone or in person the loan officer will review that info along with the list of above documents to figure out what loan options are available to you. Generally, once you submit the above items to your lender you should be able to receive a pre-approval letter when you submit an offer. The lender may ask for additional documentation. They are not trying to be difficult by asking for additional documentation, rather they are ensuring there are less things asked of you after you start the loan process. By this time you should have some rough estimates on the types of loans available, down payment requirements, and other costs associated with the loan such as mortgage insurance (if applicable).
Upfront or when you have a property you are interested in your loan officer should be able to provide to you an estimate of the loan you qualify for. This will include estimated lender costs, loan fees, 3rd party costs for insurance, escrow & Title fees, appraisal costs, prepaid costs, and more. Every lender will show fees differently and disclose them differently. If you have questions about loan estimates our team can help assist you in getting clarification.
Previous, Step 2: What is Your Comfortable Monthly Budget?
Next, Step 4: The Process of Finding the Right Home
Joe is a realtor with Better Homes and Gardens Real Estate Advantage Realty. He majored in finance and has experience as a former mortgage loan originator. He has helped buyers both with new project loans and going through the process of applying and obtaining units in new projects. He uses his finance, mortgage, and real estate knowledge to help home buyers find the right properties to fit their needs. Contact Joe by phone or email at (808) 351-8394 or JoeC@BetterHawaii.com.
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