First, what is a loan pre-approval letter?
A loan pre-approval letter is a document from a loan officer that states how much of a loan you are approved for and how much you would be putting down for down payment.
Note: The more information that the loan officer has reviewed about the buyer’s situation, the more reliable the loan pre-approval will be.
Why do we need a loan pre-approval letter?
Unless you’re paying cash for a home, we need to provide a loan pre-approval when making an offer on a house to show the owner that we can actually get the money to pay for the home.
Without this letter, the owner usually doesn’t want to waste their time considering your offer since they can’t trust that you’ve been checked out by a loan officer or lender.
What is a loan pre-approval not?
It is not a guarantee that you will obtain the loan., but the more information you provide up front to the loan officer, the more reliable your loan pre-approval will be.
How do I get a loan pre-approval letter?
There’s a couple things to get together and questions to answer to get a loan pre-approval.
In general, a loan officer should verify the following:
- Reported income amounts
- Down payment amount and source
- Credit score and situation
- Debt amount and monthly payments
- Marital status
- History of home foreclosure or short sale
- Employment history for the past 2 years
- Any unpaid leave or reductions in income in the past 2 years
So what’s first?
First, speak to a loan officer(s) of your choice and prepare the following documents.
Verifying Income
Please bring the following to your loan officer:
- 2 Years most recent tax returns
- To ensure you’ve had steady income filed for the past 2 years
- 2 Years of W2’s
- To further verify yearly income for the past 2 years
- 1 month most recent pay stubs
- To verify current monthly income
Verifying Down Payment Source
Please bring the following to your loan officer:
- 2 months most recent bank statements
- To make sure you already have your down payment amount.
- It’s best to already have the amount sitting in your account for 2 months and not just relying on the next paycheck. The lender wants to know that you’ve had this money for a while and you’re a good saver. When your down payment amount has been sitting in your account for at least 2 months, it is called “seasoned money” and can be used for a loan.
- If you are receiving gift money from a family member for your down payment, it may be necessary to verify that money was in that family member’s account for 2 months.
- The family member must also be able to sign a letter stating they have given or will give you money to assist with the down payment. A receipt or document of the wire transfer is also needed in this situation. For more details, please consult with your loan officer.
Verifying Credit
Please bring the following to your loan officer:
- Driver License and Social Security Card (actual cards)
- To check your credit report
- Any documents for bankruptcies you have filed or discharged (if applicable)
Verifying Debt
Please bring the following to your loan officer:
- Most recent home mortgage statements (if applicable)
- Most recent homeowner’s insurance statements (if applicable)
- Most recent homeowner association statements (if applicable)
- Most recent car loan statements (if applicable)
- Most recent statements of any other debt/loans/credit cards on which you owe a monthly or regular payment
Please also be prepared to answer these questions as well.
Are you legally married or unmarried/divorced?
- If you are legally married, please recognize in the state of Nevada, unless your spouse signs off ownership, they will also need to be approved with you for the loan and will jointly own the property. For more on this topic called Community Property or Common Law please read here:
- http://www.nolo.com/legal-encyclopedia/marriage-property-ownership-who-owns-what-29841.html
- Note: Being legally married but separated is still married and will affect your sale. If you need to divorce your spouse because you don’t want them to own half the house, I advise you do it before you’re in contract to avoid complications or drama.
- If you are single, unmarried, or legally divorced, then you don’t have to be concerned with the above law unless you plan to be married soon.
Have you had any short sales or foreclosures in the past?
Depending on what kind of loan you’re applying for, there is a waiting period after you short sell your home or go through a home foreclosure.
- The waiting period after a short sale is usually 2 years minimum.
- The waiting period after a foreclosure is recorded can be 7 years or more.
- If you have any of these 2 on your record, it is advised you speak to your loan officer about it before moving forward.
- It’s a bad idea to waste time or money trying to buy a home if you won’t qualify based on this issue.
Have you been continuously working for at least 2 years in the same industry or same line of work?
To ensure that you have some stability in your work situation, most financial institutions will need to make sure you have been working in the same industry or line of work for the past 2 years.
If you are not sure if your employment for the past years qualifies as being in the same industry or line of work, please consult your loan officer.
Have you taken any unpaid time off or had reduced income at any time in the past 2 years?
If there are any periods longer than a few days in the past 2 years where you have taken unpaid leave or had periods of unemployment, please let your loan officer know. This may affect how much of a loan you can qualify for. You don’t want to shop a lot for for $300,000 homes if your real limit is $250,000.
If you can bring the requested documents and answer those questions for your loan officer, they can provide you with a more reliable loan pre-approval letter assuming you qualify based on all the information you’ve provided. If you do not qualify yet, it’s better to know sooner rather than after 30 days of viewing homes.
Weaker Alternative Method: “Loan Pre-qualification” Letter
There is another document called a “loan pre-qualification letter”, but all that’s required to get that letter is to verbally tell the loan officer how much income you make.
Yes, you can get a “letter” to make an offer. But that letter is not reliable at all.
If you use a letter that is based only on your stated income (whatever you tell the loan officer, not backed up with documents), you could waste many weeks of searching for homes in price range that’s too high or worse, when you don’t even qualify to buy a home yet.
I do not recommend using this “pre-qualification letter”. It’s better to figure out exactly how much money is in your wallet (could be 0) before you go search up and down the town and ring up the house on the cash register.
You are much better off doing a little more homework with your loan officer so you feel safer and have more faith that you can pay for the houses you’re looking at.
I hope this article has helped you understand more about obtaining a reliable loan pre-approval letter.
If you have any questions at all, feel free to contact me at 702-343-2670 or lengsellsrealestate@gmail.com 🙂
Please have a great day!