If you’re thinking about buying a home, the first step is to understand your choices for financing and loan approval. If you’re selling a home, you should learn how to identify how qualified (or not qualified) a potential buyer is. Read on to learn about stages of financing and buyer qualification and how they impact your home purchase or sale.
Few prospective home buyers today start looking at homes without first having a pretty clear idea of the amount they can finance. To start, most buyers schedule an initial appointment with a local lender or mortgage broker to discuss available options.
Financing options might include:
- Conventional loans that require a down payment of 10-20%
- FHA and other guaranteed loans with minimal down payment requirements;
- VA loans with special stipulations for military buyers
- First-time homebuyer loans
- Specialty products tailored to differing income levels and/or occupations
- Other individualized loans that target specific populations, geographic areas or buyer needs
Once a buyer understands what their options are and decides which route to take, the next step is to become prequalified. Doing so helps buyers understand how much money they’ll be able to secure and how much house they can afford to shop for. Let’s take a look at each stage of the loan approval process, starting with prequalification.
Although it is not a binding commitment, an initial prequalification letter states that the recipient is a serious potential buyer. To receive a prequalification letter, a buyer must provide their lender with:
- Their full name and address
- Full information on anyone whose name will appear on the loan and on the property deed
- Estimated annual household income
- An estimate of monthly debt and expenses
Once the buyer receives a prequalification letter, it states that upon the submission of a completed loan application, the lender “should be able to approve’ a loan for the bearer in the amount stated.
A step beyond prequalification is called preapproval. At this stage, a lender will collect more personal information from the buyer and prepares documents that will later easily transition into a full loan application. At this stage, most lenders require at least the following information:
- Personal addresses for the past two years: If you’ve been renting, you must supply the landlord’s name and contact information.
- Employment history, including W-2 or 1099 information, and all sources of income;
- Bank accounts, with balances and statements for a specified period of time;
- Personal assets, including stock and investment accounts, CDs and IRAs;
- Real estate in your name or under your control;
- Personal debt; including medical expenses, secured loans on a car or boat, credit card debt, student loans and other accounts.
Getting preapproved shows another level of seriousness and shortens the loan underwriting process for the buyer. At this stage, buyers must be prepared to explain any questionable items on their credit report, including the reason for late payments, if any. Information provided for preapproval is subject to review and verification when the buyers actually have a specific property under contract.
Conditional Loan Approval
Once a buyer has submitted their loan application, the lender will review all the information and may ask for additional documentation. At this stage, the lender is looking to make sure all the finer points of the buyer’s financial situation are in order. They accomplish this by reviewing bank statements, tax information and credit reports. The lender may also request additional documentation to verify where closing cost funds will come from, etc. If everything looks good, the lender will offer conditional loan approval.
Final Loan Approval
After reviewing all the buyer’s information more closely and asking for any additional documentation deemed necessary to find the loan, the lender is ready to commit to funding the mortgage. At this stage, the lender definitively says, “This loan is approved and we will give this money to the buyer”. This happens just prior to closing and at this stage, the buyer can be confident there are no other financial hangups that will occur leading up to the sale. Sellers can also be confident that there won’t be any other hiccups.
After this approval is issued, the final loan paperwork that will be presented at closing is drawn up and all the numbers are scrubbed to verify all fees, including the buyer’s homeowner insurance, HOA fees, etc, are accurate.
Closing / Loan Funded
At closing, the buyer will sign all of their final loan paperwork and will find out what the total cost of the loan (inclusive of tax) will be. After the final paperwork is submitted, the loan will be funded and the buyers will get keys to the house.
A prospective lender or knowledgeable mortgage broker will be your best resource as you embark on a home search. Take the time to find someone with whom you can forge a comfortable relationship.
The ins and outs of financing can be complicated and confusing, but if you take the time in the beginning to iron out the creases, your house-hunting experience can be pleasant and trouble-free.
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