Buying Your First Home, The Survival Guide: Getting Pre-Approved

By Stevie Duffin Updated on 7/20/2017

Editor’s Note: This article is the first in Lender411’s Buying Your First Home, The Survival Guide trilogy. Skip to the second entry, Calculating Costs or the third, Choosing a House.

Never fear, The Survival Guide is here.

Every possible loan option and home buying scenario cannot be covered in this series, as the home buying process is rife with unforeseeable nuance. However, you will find that The Survival Guide is a comprehensive map of the most general and pain-free route to home ownership in cozy, chronological order. Because let’s get real, life isn’t as easy the covers of The Saturday Evening Post would have you believe.

Part One: Getting Pre-Approved

In the path to homeownership, the most significant obstacle most first-time buyers is approval for financing. Here are the steps you must take to secure a mortgage loan pre-approval so you can shop for homes confidently.

Gather your credit history.

You need to know your credit score. To eliminate the headache, you’ll want at least a 640 (the average minimum required), but 720 is better for a lower mortgage interest rate. 

Some lenders will finance for less than 640, but building up credit before buying will make qualifying, and consequently your life, easier. Obtain credit reports from the three major credit bureaus: Equifax, TransUnion, and Experian - you can do this once per year for free. Your lender will use these to determine your interest rate so your credit history must be as clean as possible.

If you glance at your credit reports and see something that you’d like to dispute, contact a mortgage specialist and ask for a Rapid Rescore. 

This is a way to hike up your score in a short amount of time, in the event you identify a discrepancy you know to be incorrect. Be advised your credit report cannot state dispute on any account, which is why working with a specialist is key.

You know you can afford to buy a home when you have saved enough money to pay a down payment. That down payment may also mean you'll qualify for a loan modification program down the road if, heaven forbid, you need it.

Many first-timers don’t have the cash to put down the ideal minimum of 20%. Your mortgage officer should be able to find alternatives that work for you. 

Find a lender.

Common avenues are through a bank or a mortgage broker. Big banks tend to have more overhead and therefore more fees, as well as a smaller product selection. They lend you their money and broker your deal from the inside. Independent brokers have lower fees and will match you with an outside lender (the money source) based on your financial history. 

Brokers survey several different lenders and subsequently offer many loan programs for a variety of borrower backgrounds.

Be cautious of shopping around too much. If several brokers are running credit checks for you, your credit score will be lower, and this may even raise a red flag for the lender. You could find yourself knee deep in requests for explanations of the multiple credit inquiries and lowered score.

Get pre-approved by your lender.

Other guides will tell you to get pre-qualified at this point, but that is a simple process that does not hold weight like a bona fide pre-approval.  

In the latter case, your application is sent to a mortgage underwriter qualifies you for a certain loan amount based on your credit history and financial standing. This is important because many sellers and realtors will not work with you unless you’ve been at least pre-qualified for a loan.

Before your visit for pre-approval (or pre-qualification), gather the following documents at a minimum:

• Last two years’ W2s or income tax returns (if you’re self-employed)
• Last two monthly assets statements (e.g. checking and savings account, 401K)
• Last two pay stubs (or four if you get paid once per week)
• Last 12 months of canceled checks, if you were previously renting with a private landlord.
• Letters of explanation detailing the resolutions of any discrepancies in salary, credit inquiries, or any other payment history.
• Source of your down payment. While cash gifts for down payment are allowed, the source of your large account deposits must be verified. Be aware that gift monies must come from immediate family members.

Your next step is to consider the cost of purchasing your first home. Be realistic about costs. However much you make, don’t shop for a home that will gobble up most of your income each month. In addition to mortgage and principal payments, buying a home means paying for insurance, maintenance, and real estate taxes.