Mortgage Update

Buyers with a mortgage pre-approval have a distinct advantage when they are ready to deal. An approved mortgage establishes a shopper’s buying power. To speed the process and strengthen their bidding position, many home shoppers check their credit report and get pre-approved for a mortgage before looking for a house.

*** Advantages to Pre-approval
Pre-approval will determine the maximum you can spend on a house before you shop, so you know what price range to target. Many shoppers aim too high, bidding on a home that they later learn is beyond their means because of unforeseen debts or other financial factors. A pre-approved loan is the equivalent of a cash offer. Sellers are more likely to accept such a secure bid over other, simultaneous bids for which financing is still pending -- even if those bids are higher. The contract you sign upon submission of your bid allows a finite period in which to find a mortgage --typically 30 days or less. If you fail to secure financing within that period, the seller may drop your bid. Pre-approved buyers can rush the closing if the seller is in a hurry to deal.

*** Approval vs. Qualification
Know the difference between pre-approval and prequalification. In a true pre-approval, the lender will present you with a letter, certificate or wallet-size card bearing your name and the maximum loan amount. It proves that an underwriter has completed all the checks and guaranteed your loan.

*** What Paperwork Is Required for Pre-approval?
Loan underwriters examine an applicant’s resources, income and debt to determine eligibility. A credit check is the foundation of this process. Many homebuyers choose to inspect and clear their credit reports before applying for a mortgage. To be pre-approved for a mortgage, you must supply copies of your:

W-2 forms (usually two years’ worth) or profit-and loss statements (for self-employed individuals). W-2 forms allow the underwriter to scrutinize income and job history, which directly affect applicants’ buying power and help reveal how great a risk they might be to the lender. Profit-and-loss statements help self-employed individuals substantiate their income. Gross income may appear low, but business expenses are often “written back” in tax deductions. Lenders usually require profit-and-loss statements, at least for the current year (year-to-date).

Pay stubs (usually one month’s worth). Pay stubs help confirm current income level and verify the applicant’s employment. Upon closing, most lenders reconfirm employment, especially if much time has passed since the loan was underwritten.

Bank statements (three months’ worth), including: checking, savings, other assets, such as mutual funds and CDs,. Bank statements indicate the applicant’s resources. Underwriters generally hope to establish that the average amount required for a down payment has been maintained over time -- not recently obtained.

Tax returns (usually two years’ worth). Tax returns provide a wealth of financial information. Underwriters look for red flags that could reveal an unforeseen debt in the case of an audit.

Experts recommend mortgage pre-approval for almost all home shoppers, but some buyers are even more likely to benefit. They include:

• First Time buyers, who have no equity. First-time buyers are seen as an unknown quantity, both by sellers and lenders, simply because they have no equity. A bidder who has equity is likely to be taken more seriously than a first-time buyer in a competitive situation. Pre-approval should help alleviate this distrust.

• Self employed individuals, whose income may not be well reflected in a tax return and may be perceived as less stable than that of a full-time employee. Self-employed individuals often look bad on paper. When business expenses are high, the result often is lower-than-expected bank balances. Many of these expenses are “written back” in tax deductions. Lenders usually require that self-employed workers submit a year-to-date profit-and-loss statement. Free-lancers, particularly, tend to live the type of boom-and-bust existence that makes lenders nervous. Their approval process is bound to take longer than that of a full-time employee who, for example, has held the same job and filled out the 1040EZ form for 10 years. In a competitive market, time is precious, and pre-approval keeps self-employed home shoppers in the running.

• Home Sellers, who may need to purchase a new house quickly once their current one sells. Home sellers often need to find and buy a house quickly once their current home sells. Mortgage pre-approval facilitates this approach. On the flip side, home sellers often are interested in non-contingent offers, those that don’t depend on any other sale or condition. Given that they may be at once selling and buying homes, they may not want to complicate matters by dealing with someone who is doing the same.