Six months ago I moved in to my first house, but the process started nearly a year ago. Early in July 2017 I made the call to a mortgage group in my home town that my friends had gone through. I let them know I wanted to buy a house in early 2018 and wanted to learn my next steps and start thinking seriously about the process. The group was very into education and helping locals get mortgages. I had about a 30-minute phone conversation and then came in for an in-person meeting. I consider both of these as two parts of one pre-approval meeting. This meeting really got me started. And even though this pre-approval meeting was crucial in my path to buying a home, I did not end up going through this group to get my mortgage. Later, I will tell you about my second pre-approval/second opinion meeting I had with Howard Hanna whom I went through for my loan.
If you are serious about buying a home, you should get a pre-approval before you get a realtor, or at least get them around the same time. You don’t want to end up shopping in too high a price range than what you’ll actually be able to afford.
Why is pre-approval important?
- Makes it real so you can stop shopping on Zillow and actually find a realtor
- Empowers you to know you are financially prepared for this next step in life and to know what financial conditions need to be met before you pull the trigger on putting in an offer on a house.
- You have a chance to ask questions
- You should ask about current interest rates, PMI, various loan terms, loan types, buying “points,” getting an MCC (Mortgage Credit Certificate), monthly payment, closing costs, discounts available.
- Your interest rate will be determined by a combination of the market and your credit.
- You might even want to “lock-in” your rate if you’re ready to buy soon. The Fed is probably going to raise the interest rate 2 more times this year so if you are going in for a meeting near a Fed meeting (just google it), you might seriously consider locking in your interest rate. Rate locks are generally good for 45 days. I did not do this because I bought 5 months after I was pre-approved. Originally, I did not think I would buy until 7-9 months after my first pre-approval meeting.
Yes, I and many other blogs out there are going to try to help you get through this process and give you as much knowledge as possible, but nothing beats talking directly with the lender. Knowledge is power!
What you need to bring to your pre-approval meeting
- Driver’s License
- Proof of income
- Two most recent pay stubs
- W2 for past two years
- Proof of Assets
- Any account statements: checking, brokerage, savings, retirement
- Additional Documents the lender might want
- Official loan documents might be necessary. My FedLoan account has a link to getting a Loan Verification Letter readily available at the bottom of the main page. Both lenders I worked with did not ask for this. I assume they just used my credit report to ascertain this information.
- When I was getting pre-approved for the second time, as I was putting the offer in on my house, they saw a transfer of money out of my checking account of $5000. They wanted to see the pay check that came from and I showed that it had been transferred to my Barclays High Yield Savings Account.
What the lender will do to pre-approve you
Check your credit
They will do a “hard pull” on your credit. This then shows up on your credit report later in time. If you are thinking of shopping around for rates and the best mortgage broker, there is a common notion I’ve read in several places that if you have your credit pulled by multiple sources within 30 days of each other, it only counts as one hard pull. However, that was not my experience. There were two hard pulls on my credit in November that both show up in my credit report. Experian and my Nerdwallet account both show me these things. So having been pre-approved 3 times technically is hurting my credit. It’s not a big deal for me because I don’t need credit for a while. Just know your situation.
If you have excellent credit, you will likely get the best interest rate available. The interest rate is one of the most important terms to your mortgage so you need to get it as low as possible. Do not let anyone fool you into thinking oh a quarter of a percent doesn’t matter much or a tenth doesn’t matter. EVERY BIT MATTERS. While 0.25 seems like a small number, it’s not when it’s a percent on many tens or hundreds of thousands of dollars.
Verify your employment
They need to make sure you are and will continue to work at the source of income. Find out who the best person in your company is for them to call. A lot of places HR might take care of this, but in large urban school districts (like mine) the answer isn’t as easy.
What happens in a pre-approval meeting
The mortgage broker will look at your income and your assets and liabilities to determine how much house they think you can afford. I say “how much house they think you can afford” because their formula is in no way rooted in reality. Remember the common recommended guideline is to keep your housing expense to 25% of your monthly take home pay. In some higher cost of living areas, it could go as high as 33%. But it is your responsibility to follow this rule of thumb so that you don’t get underwater in expenses. The bank isn’t using that formula. When I was getting pre-approved, they told me I could afford a monthly payment of $1432. I laughed. I literally laughed out loud. I asked “and how do you figure?” The broker told me that the standard is to approve you for 40% of your gross income. FORTY PERCENT! Of your GROSS INCOME! Forty percent of my gross income is about the same as 60% of my take home pay, almost 2.5 times what my personal budget tells me I can comfortably afford. Just because the bank tells you that you can afford something, doesn’t mean you can afford something.
What you can do next in that meeting is very important. Don’t just say “OK” to whatever number they tell you. I said, “no I can afford $700-$900 a month if that includes the property taxes.” Don’t forget you have to pay property taxes once you become a home owner and it’ll be a good couple thousand here in the Midwest. I did not truly want a $900 a month house bill but I wasn’t that familiar with the housing market in the area or with the financial situation a homeowner faces. I kind of accepted that I would probably need to pay more than I was using to paying in rent because of the additional costs associated with home ownership (note that my mortgage costs me $759 which includes Principal & Interest, PMI, Property Taxes, and Homeowner’s Insurance).
The broker respected my plans and then offered me a home price then that I could afford. He had a spreadsheet open and was running numbers with me the whole time and showing me different scenarios. Your broker should be willing to answer your questions about numbers and if they’re not, they might not be the right broker for you. Yes, all brokers want to make the bank money, but they should be willing to speak to you as a person who doesn’t have endless funds and is making the biggest financial decision in their life to date. In the end, my broker still pushed my approval to the highest end (no surprise) I could possibly afford and wrote $120,000 on the pre-approval certificate. It’s really important for you to know what your housing expense boundaries should be before you go into the broker’s office. If you wait until after the meeting to think about it, you will be tempted to push your boundary higher than what you can realistically afford. This isn’t your fault, it’s human nature. If an authority figure tells us we can do something, we’re likely to believe it.
This did not happen with me but I have heard from other people that realtors can use that pre-approval certificate as “guidance” and show you homes at the highest end you can afford and even above. I’ll write more on working with a realtor later, but mine was amazing and he never asked to see that certificate or asked me about my financial situation. He asked me to pick out homes I was interested in and he showed me similar type homes.
In addition to the preapproval certificate, the broker might give you a worksheet so that you (and your realtor) know how to shop for homes and how to prepare the actual offer for the home. On my worksheet a few things were listed out. First, I’d be getting a conventional loan, requiring 3-5% down. Second, I’d aim for $750 monthly payment. And third, I’d get help from the seller with closing costs. Recall in my article about saving your down payment, I talked about how it’s not necessary to pay the closing costs. You can request the buyer do it. There are other things that might be on the worksheet that could be a “to-do” item for you. The conditions could be things like paying down credit card debt or paying off some other loan. It could be saving up the down payment they listed as required earlier in the document. This document is more like a summary of the conversation I had with the broker that day. It kept the big ideas in my mind as I went out to house hunt. You don’t have to show this document to your realtor. And you don’t have to do what these documents say to do! Like the 3-5% down payment: if you put less down, you borrow more, and the bank makes more money. So just because they told me I only need to put down 3% doesn’t mean I couldn’t put 10% or 15% down. They might subtly, or explicitly, encourage you to save stash of cash for home renovations. I got a house that was ready to go so that my PMI (private mortgage insurance) was only $12.01 and that will go away after I build up that 5% more equity in the house.
Other take-aways from my pre-approval meeting
My in-person pre-approval meeting was pretty long, about 2 hours. This might not be normal. The brokers I was working with talked to me in depth about buying a condo vs. a “stick built” house. After considering the condo fees, the fact that condo associations can call for updates to all condos at once that the owner has to pay for, and that it seemed like I would need to do a ton more research to choose a good condo association, I abandoned my desire to live in a condo after this meeting. I was originally interested in living in a condo because I didn’t want to deal with landscaping nonsense. But they helped me figure out that I’d much rather mow the grass than be forced to pay for changes to my home when I am not ready or interested in making the changes.
The broker also offered me a rule of thumb that was helpful in financial planning. For every $1000 additional you put into the down payment, $5 will come off your monthly payment. This rule was very helpful to me because I got a windfall of money mid-November, right as I was house hunting. I was able to put $5000 more down that I didn’t think I had when I began shopping.
What you need to do after you get your pre-approval
- Don’t change your job.
Changing your job would impact your preapproval since they took the time to verify your employment. It could mean you don’t get approved because a new job means less stability. You look flakey.
- Don’t do anything that could drastically change your credit.
Preapproval generally lasts for 30 days but it is not difficult to reobtain if your financial and professional situation have remained the same. I got my preapproval in July but I did not need to worry that I was no longer approved just because the certificate had expired. Do not buy a bunch of furniture or anything else on credit trying to prepare for your new home. In addition to changing your credit, you risk using up funds you need for other fixes to your home you don’t realize you need.
- Get a real estate agent and start shopping for homes!