You’re ready to pursue a mortgage. When should you seek a pre-approval? In short, the answer is “as soon as possible.” There are many advantages to getting pre-approved as early as possible. Items related to your credit, income and assets should be addressed early while there is still time to remedy any issues. One of the biggest mistakes that homebuyers make is assuming that their credit, income and assets will qualify them for a home purchase. Let’s take a look at credit and how reviewing your credit report early on can provide a tremendous advantage.
We pull a tri-merge report that provides your score from Experian, Trans-Union and Equifax. Your credit mid-score is the number that is used for loan qualification purposes. In other words, if your three scores are 698, 750 and 780, then 750 is the score used for your qualification. Your credit score can influence your interest rate and the loan products to which you have access. For example, there is a fantastic loan program that allows for 10% down payment with no mortgage insurance through use of a home equity line of credit. But there is a minimum required credit score. If your score is slightly under the required minimum, there may be items you can address now that can increase your score before you start making offers. Another example could be the proportion of credit card balance to credit card limit. A reduction of credit card balances or an increase in credit card limits can have a positive effect on your credit score. We review your score and identify any items that could potentially increase your score early on while there is still time…before you are under agreement on a new purchase. Now that we have addressed the importance of analyzing your credit report, let’s take a look at income.
If you are self-employed, then you probably pay yourself through your personal tax returns on a Schedule C or you have a company and file corporate or partnership tax returns. Loan underwriters will analyze the most recent two years of tax returns in order to determine an accurate income number. The number that we come up with for your income may not be what you consider your income to be. This is because we’re looking at your income after all of the expenses that have been used to reduce your taxable income. Tax return analysis for loan purposes follows a specific calculation method that can result in an income number that is higher or lower than what you may have expected or assumed. If you earn commission income, then there are items on your personal tax returns that can cause significant variation or reduction in the amount of your income that can be used for loan qualification purposes. An accurate income number plays a key role in determining your maximum possible loan amount. Figuring out your total income number early will save you and your realtor many hours so that you’re not looking at properties outside of your means.
Assets, or funds that you have available for down payment and reserves, are the next items for us to review. The sooner we analyze your funds available for purchase, the more time we will have to put together a strategy for your funds to close the purchase transaction. Generally, it is best for your funds to be in personal accounts. When you plan on using funds from a business account, this narrows down your loan options and therefore can increase your rate. In order to maximize your loan options, plan to have all funds available for down payment and reserves in a personal account for 2-3 months prior to purchase. If you wait to transfer funds from a business account into your personal account until the last minute, then those funds are considered coming from your business account. Cash cannot be used toward a down payment on a purchase loan. But if you deposit the cash into a bank account and then provide two bank statements where the money was already in the new account(e.g. no cash deposit on the statements), then the cash has been “seasoned” and may be used for the down payment and reserves. We can also discuss other sources of down payment such as gift funds, 401k loans and investment account liquidation to make sure we comply with underwriting rules.
As you can see, getting started on your pre-approval as early as possible has tremendous advantages that will save you time and money down the road.