If you’re ready to buy your first piece of Indianapolis real estate then you should strongly consider getting pre-approved for a mortgage loan before starting your search for a home. There are several reasons for this:
- Most real estate agents greatly prefer to work with borrowers who are pre-approved because experience has shown them that many things can go wrong in the loan process.
- Not only can these problems jeopardize various timelines, including the closing date and interest rate-lock expiration deadline, but they can cause the entire deal to fall apart in the most extreme cases.
- Getting pre-approved is the best way of knowing whether any such issues exist.
- Fixing loan-related issues is its own challenge; fixing loan related issues under threat of a time constraint is an even greater problem.
Start by gathering your income documentation:
- If you work as W2 tax classification then you’ll need to gather your most recent 2 years’ worth of W2’s. As a general rule, lenders will take a 2-year average of the income shown on your W2 form.
- If you are a commissioned employee, self-employed or have variable income then lenders will most likely want to see 2 years’ worth of income tax returns, including any profit-and-loss statement, if applicable.
- If you received 1099’s then you should bring these too.
- You should bring your most recent paystubs, preferably covering your most recent 1-month wage period.
Credit reporting issues:
- In almost all cases, a minimum credit score is required in order to be eligible for a loan.
- Disputes with creditors, erroneous or misreported credit information, stolen identity, divorce: These are just a few contributing factors that can lead to credit reporting problems.
- If an inaccuracy is bringing down your credit score then you will need to resolve the issue by dealing with the credit reporting agencies and/or creditors. Once the problem is fixed your credit scores will be rectified.
- You loan officer may be able to submit a request to his or her credit report provider to update your credit report upon receipt of sufficient documentation.
Letters of explanation:
As the saying goes, “Life happens”. If you are aware of a any issue that may impair your ability to get a loan then you should gather as much relevant documentation as possible and then proceed to write a letter of explanation. Lenders will want to include this letter of explanation in the final loan file as evidence supporting their underwriting decision. For example, you were wrongfully terminated from a job, which in turn created a financial hardship. As a general rule, lenders are looking for evidence that any negative occurrence was beyond the borrower’s control.
FHA versus conventional:
- Conventional loans are insured by a Government Sponsored Enterprises, also known as “GSE’s”, such as Fannie Mae or Freddie Mac. Conventional loan lenders use guidelines handed down by the GSE’s to determine a borrower’s level of acceptability. Conventional loan guidelines are stricter than those of FHA.
- Conventional guidelines generally require a borrower to have a minimum 5-percent down-payment. What’s more, there is often a ‘seasoning’ requirement whereby the borrower must have possessed these funds for a certain minimum length of time. Lenders will ask for bank statements to verify the deposit history. Any sudden deposits that aren’t consistent with a borrower’s income and expenses may require a letter of explanation. This is a way of determining the source of funds—e.g., credit card cash-advance, loan, gift, etc.
- Whereas with FHA, not only is the down-payment is slightly lower, at just 3.5 percent, but the down-payment funds can come from a family member as a gift, from a charitable organization or from the borrower’s employer. And unlike conventional guidelines FHA has no seasoning requirement for the down-payment funds.
- Unlike conventional loans, FHA has no minimum credit score requirements. FHA lenders must simply evaluate a borrower’s overall pattern of credit behavior to determine whether the risk is acceptable. In practice, however, even most FHA lenders voluntarily impose minimum credit score requirements. Still, even these lenders and even many small, community banks may be willing to work with borrowers who have good explanations for their low credit scores—e.g., life events that were beyond their control. FHA will not deny mortgage insurance for any borrower that has as acceptable explanation for credit low scores or no scores.
- If you have great credit and 20-percent to put down on a home you should strongly consider a conventional loan since you will not be required to have private mortgage insurance, also known as “PMI”. Whereas, with FHA a borrower is required to pay a mortgage insurance premium, also known as “MIP”, for the first 5 years of the loan regardless of loan-to-value.
Find a lender:
So you’ve painstakingly gathered all appropriate documentation and are now ready to apply for a loan. If you’re seeking a conventional loan then the best way to find a good lender is via a referral from someone you trust; someone such as a real estate agent or friend who presumably has some basis for recommending a particular mortgage lender or mortgage broker.
If you don’t know anyone who can make a recommendation then the best thing to do is contact several lenders. By speaking to at least 3 lenders you should get a feel for the one with which you feel most comfortable. You will also be able to get an idea of how much closing costs will run. Once you’ve decided on a lender it shouldn’t take long to apply since you’ve come prepared with all the documentation that lenders typically ask for.
Find a real estate agent and start shopping:
Once you have your pre-approval you are now ready to start shopping. If you haven’t already found a real estate agent it shouldn’t be hard. Now that you have a pre-approval letter you’ll find no shortage of real estate agents who are willing to assist you in buying your first home.
There is also no shortage of beautiful Indianapolis homes for sale that will not only fit the limits of your loan but satisfy any other personal criteria you might have.