Get a preapproval letter before shopping for a home

Before you start home shopping with an agent, it is recommended to get a preapproval letter from a bank or lender. The preapproval letter indicates that the bank is willing to lend you a certain amount (usually an amount greater than you are likely to spend). This will involve paying a small fee for the lender to run a credit report on your credit history in addition to reviewing all of your financial documents.

Prepare the following documents into a folder for the lender to review and verify:

• 2 years of W2 statements and tax returns
• other income, assets, and bank statements of every account
• every document that proves income, gift amounts, assets, and debts

With the preapproval letter in hand, you indicate to the sellers and real estate agents that you are a serious qualified buyer for the type of house you are looking at. This can help home sellers in choosing you over other interested buyer who may not appear as financially ready without a pre-approval loan letter. Sellers don’t wish to deal with uncertainties, and a pre-approval letter from the bank lets the sellers know that you have a lender committed to providing you with the proper funds to buy their home. A pre-approval letter is as good as opening up your folder of financial documents including W-2 and tax returns to the sellers for review.

Pre-approval letters are not a guarantee that the bank or lender will definitely loan you the money because the actual loan application process is much more comprehensive where the lender reviews your financial documents with a fine comb to determine that you are not a risk to default on a loan before the lender denies or approves the loan.

• For example, a lender may not approve your mortgage application even if you have a pre-approval letter because you took out a loan on a new boat and new car causing your debt-to-income ratio to exceed the 43% rule while you were shopping for your home.

Also, you don’t necessarily have to use the same lender who provided you with the pre-approval letter.

• It is in the best interest of the borrower to choose the best mortgage deal as the lender who provided you with the pre-approval letter may not have offered the best rates.
• In another scenario, you may decide to go into contract on a new construction condominium unit with less than 50% of the units sold, the lender who provided the pre-approval letter may not be able provide loans to new buildings without 50% of units sold, then you have to go with another lender.