April 20, 2017 by Space Coast Credit Union
Q: Every mortgage company ad I read mentions either pre-qualification or pre-approval. Is that something I need to do before I start house shopping?
In short, there are two phases to securing a mortgage
While it can cause some confusion, lenders may refer to either phase 1 or phase 2 as pre-approval, and the other as pre-qualification. Rather than focusing on the labels, let’s focus on the steps involved in securing a mortgage and what the steps mean. For the purpose of this article, we’ll keep referring to them as “phase 1” and “phase 2”.
What Do I Need for Phase 1?
In phase 1 of the process, you describe your financial situation to a potential lender. Usually, this information includes salary, savings and current debts. The lender may or may not pull your credit score at this point. Based upon that information, the lender will make a determination about the kind of loan you might qualify for, assuming everything you’ve said is true.
You don’t need to prove anything at this point. It can be done over the phone, online or in person, and no documentation is required.
During phase 1, you might want to compare possible mortgage rates
. There’s a lot less paperwork involved, so it’s much easier to ask a lender to run through a variety of scenarios. You can look for a loan situation that combines the monthly payment, interest rate, term and down payment where you have the most comfort.
Phase 1 can be completed early in the house shopping process. In fact, it makes sense to do this before you view the first house. That way, you won’t fall in love with a house you can’t possibly afford or convince yourself to settle for a house that doesn’t really meet your needs. This also gives you the chance to straighten out any potential kinks in your financial situation before starting phase 2. Don’t worry about multiple checks on your credit if necessary. Credit bureaus lump mortgage inquiries within 30 days together as one inquiry, so they won’t adversely affect your credit score.
It’s important to note that pre-qualification is not a guarantee of a loan. Completing phase 1 is a way to get an idea of how much you can afford to spend during your house hunting, as well as a way to show potential sellers that you’re serious. Completing phase 1 illustrates to a buyer that you are already part of the way through the lending process, and it’s less likely that your financing will fall through.
What Do I Need for Phase 2?
Phase 2 is where the paperwork starts to fly. At this point, a lender is deciding whether or not to issue you a loan. Successfully completing phase 2 means a lender is ready and willing to provide you with a loan up to a specified amount.
To navigate this step, you’ll need to prove everything you claimed in phase 1. This means you need to provide tax forms to substantiate your income and account statements to verify your savings. You’ll also need to sign a variety of forms giving your lender or their agents the power to talk to employers, landlords and the IRS about your financial security.
Generally, lenders will want tax returns for the past two years, including supporting documents like W-2 forms. If you’ve switched jobs a few times in that span, you may need to go further back to demonstrate consistent employment. If you’re an independent contractor or own a small business, documentation requirements are significantly steeper. You’ll need to provide enough financial disclosure to show lenders that you can make the payments.
Completion of phase 2 is a conditional approval for a loan. If the house you’re buying passes appraisal, you will get financing on the terms you’ve agreed upon with your lender. The paperwork is a bit more cumbersome, so you don’t want to do this multiple times. Only complete this step with a lender you’re going to borrow from.
Phase 2 is best to complete before you make an offer, especially in competitive markets. A letter of pre-qualification or pre-approval that shows your financing is in place does a lot to reassure sellers that your offer will survive until closing. If you’re on the fence about what house you’ll put an offer on, this process can still be completed with the property identified as “to be determined.”
Don’t worry if this process seems confusing! With Space Coast Credit Union you’ll be working with a qualified mortgage professional who can answer all your questions. One of the benefits
of working with an institution you trust for your mortgage is that it clears your mind to focus on the important stuff, like where to put the sofa!