A pre-approval letter verifies your ability to purchase a property. It is based on several factors including your credit score, job and employment history, current income, bank references, and the ability to fund your down payment. However, it does not specify numbers for each item. After all, you wouldn’t want to advertise your bank account numbers or credit score to every seller or broker you encounter. The letter verifies that a responsible lender has taken a good look into each area and drawn a conclusion about your home-buying ability.
Apply for a pre-approval letter and your lender will tell you exactly what information is needed. A few items are certain to appear on the list, including:
* All lender’s will require you to run a copy of your credit report for anyone planning to be on the loan
* The last two years of W-2 forms verifying your income
* Your last two recent pay stubs, proving employment and income for the current year
* Two months of recent bank statements
If you’re applying online, you will need to have the ability to scan and email or fax the above mentioned items. If you’re visiting a lender in person, you’ll save time by arriving with these items in tow. If the property purchase will be a joint affair (say among a husband and wife), you will obviously want documentation for both parties.
Obtaining a pre-approval letter may be instantaneous (particularly online), or it may take up to 48 hours, depending on bank bureaucracy.
Sellers and their agents see prospective buyers on several levels.
At the bottom are those who make no attempt to establish their home-buying credentials. For them, home-shopping is kind of sport. Brokers try to usher them out the door with just a handshake and a brochure. They are usually not taken very seriously unless they show-up with the ability to pay in ‘cash’. Even these buyers require that their funds be verified.
A notch higher is where you’ll find the pre-qualification crowd. The holders of “pre-qual” letters have at least walked into a bank or gone online and answered a few questions about their financial situation. Pre-qualification letters require basically no verification. The idea is akin to the stated income mortgages of a few years ago, when false claims about their income and assets actually got a certain number of people into undeserved financing, called “liar loans.”
Highest, where you should aim to be, is the pre-approval position. Here your assets, income, and debts are actually verified by the lender. Nevertheless even a pre-approval letter is not binding. It is not a mortgage commitment or guarantee of credit. Banks know your situation might change between now and closing time.
Yet another reason for a pre-approval letter is the real estate agents have a sixth sense about who the serious buyers are. Some agents, in fact, won’t deal with you at all without pre-approval. A pre-approval letter gives you leverage when negotiating with sellers. You as well will feel more confident knowing what you can borrow and buy.
The letter could be written in one of two ways. It could state the maximum purchase price you can afford, addressed “To Whom, It May Concern.” Or it can be addressed to a specific seller or his agent, stating your qualifications to pay a specific amount for the home. Either way it is something that you will need once you become serious in getting a real estate professional to work for you.
I know because I have asked all agents I am affiliated with, and none will provide their valued time to potential buyers without a pre-approval letter.
Update: You said you were in school, let them know that you were in college(I assume) and they will accept your transcripts. It helps to explain your history and why you were not working a full time job at the time. I closed a couple in Dec. and used his transcripts where he had graduated 9 months prior. If I can answer any questions, more specific to your situation, please feel free to call or email me.