Before you begin the search for a new home, it’s best to obtain pre-approval for your mortgage. By getting pre-approved, you'll know exactly how much you're able to borrow, and may be able to lock in to current interest rates. Secondly, being pre-approved puts you in the driver's seat by showing the buyer you're ready to make a serious offer. In fact, some sellers and real estate agents require pre-approval before they will show a home.
Don't confuse "pre-qualified" with "pre-approved." There's a big difference. Getting pre-qualified gives you a general idea of your borrowing power but does not provide actual approval. Once you've been pre-approved, all you need to complete the transaction is agreement with the seller and an appraisal. Basically, when you've been pre-approved all you need is the house!
You should note that a pre-approval is based on your personal circumstances at the time of application. Should any of those circumstances change, your approval may be affected negatively. Also be aware that your approval will expire after a specified period if you haven't purchased a home.
At 1st Source Bank, you can apply for a mortgage online from the convenience of your home or office. You can also meet with one of our experienced lenders who will guide you through the process.
Preparing For Your Loan Application
To help you prepare for your mortgage loan application, 1st Source has prepared a check list of documents and information you'll need to take with you when you meet with your lender. This information is used to verify your income, assets, and debt. Preparation before hand makes the process easier, and increases your chances of being approved.
Be sure to bring:
- Copies of the purchase and sales agreements (if you’ve already made an offer).
- Pay stubs for the past 30 days.
- W2 forms for the past 2 years.
- If you're paid on commission, copies of 2 years' signed tax returns including all schedules.
- If you're self-employed, the past 2 years' signed tax returns (personal and business) including all schedules and a signed year-to-date Profit and Loss Statement.
- Bank statements for the past 3 months.
- Divorce Decree, if applicable: If you receive alimony or child support, you'll need documentation verifying the past 12 months support you've received.
- Proof of additional income such as dividends, interest, child support, or income from a rental property.
- Bankruptcy, if applicable:
- Notice of Discharge
- Schedule of Debts
- If you are receiving a gift from parents or relatives for the down payment, you'll need a signed gift letter. The letter must state that the money is truly a gift and no repayment is required.
- Credit explanations, if applicable.
- Your checkbook.
Meeting with a Lender
Once you’ve gathered all of the required documentation, it’s time to make an appointment with a lender at 1st Source. The meeting will probably take 1 to 1 ½ hours so plan accordingly.
During the appointment you will have the opportunity to ask questions about all aspects of the process including terms, types of mortgages, the appraisal, and anything else that needs clarification. The lender should explain the different types of loans, current interest rates, and offer you advice on what may be best for you. When you are approved, you will receive an approval letter you can show to real estate agents and prospective buyers letting them know you are a serious shopper with approved financing.
Some banks use automated systems that decrease the amount of time it takes to review and approve a loan. 1st Source Bank uses a system like this that streamlines the application process.
After your meeting, you'll have a lot of information you didn't have before:
- The size of your expected down payment
- An estimate of the closing costs
- What additional documents are required, if any
How To Increase Your Borrowing Power
If you are disappointed with the amount of money you're able to borrow, it's possible that you'll have to come to terms with buying a less expensive home. Before you do though, consider some options that can increase your borrowing power.
- Reduce your existing debt by paying off current loans. Now is not the time to buy a new car.
- Wait until your household income increases, then apply for a mortgage.
- Search for financing options that require a lower down payment and smaller monthly payments.
- Put together a larger down payment to reduce the amount you need to borrow.
- Keep your eye on the housing market and wait for interest rates to drop.
If Your Loan Application is Denied
If your loan request has been denied, your first question will be "why?" Here are the primary reasons mortgages are denied and what might be done to correct the situation.
- Poor credit rating
- If your request is denied because of a poor credit history, you should obtain a copy of the report and challenge any errors it may contain. If the report is accurate, you may have no choice but to work on correcting the problems before you can apply again. If you have a non-traditional credit history (payments to landlords, utility companies, etc.), you may be able to approach a non-profit housing group to help you present this information in a more positive light.
- Insufficient income
- In this case, the formulas the lender uses for qualification have shown that you simply don't earn enough to afford the mortgage payments. If there are extenuating circumstances, point them out to the loan officer. If you are in line for a raise at work, ask the lender if a letter from your employer would help.
Whatever you do, don't give up. Make plans to correct any problems and pursue your dream. There are credit and housing organizations that can help you with your plans for home ownership. Remember, there are also programs that can help the low to moderate income homebuyer. These alternative approaches may aid you in overcoming some common hurdles and obtain quality, affordable housing. Ask your lender if you qualify for any of these programs.
These programs include:
- Community home buyer's programs
- Housing finance agency programs
- Subsidized second mortgages
- Lease-purchase mortgage loans
- Community home improvement mortgage loans
- Community land trust mortgage loans