Just yesterday I received the exciting news that we’re finally pre-approved for a new home purchase.
After a little bump in the road with the guys at Quicken Loans (who did a great job with our refinance), I was able to escalate my case and received an almost instant approval for a new home loan.
They were satisfied with the income showing on our two years of self-employed tax returns, our credit scores, our proposed down-payment of 20%, and our current savings and debt levels.
Be clear about what you want from the lender. Make sure you are getting an actual mortgage pre-approval letter vs a pre-qualification, which doesn’t carry as much weight.
Importance of a Mortgage Pre-Approval Letter
I now have a pre-approval letter in hand. This letter is evidence that a lender is prepared to work with me and it gives all parties involved in the pre-sales process confidence that we’re ready to move forward.
Before you search for a new home it’s wise to go after a pre-approval letter. Your real estate agent might even require you to have one before dealing with you.
Same goes for the selling party. They may not consider offers from people without a pre-approval letter. Or they may be willing to work with someone with a pre-approval letter even though they came in with a lower bid.
Our pre-approval letter is good for 90 days. It’s also subject to a full, formal underwriting review once we get a home under sales contract. So, we’re not completely out of the water but from my understanding it’s the best foot forward at this point other than having 100% cash.
I was surprised they didn’t need me to have a rental contract on our current place to get the letter. The fine print on the letter states that they might require that. But verbally, the lender told me I didn’t need it.
Increase Your Chances of Pre-Approval
We weren’t in the best financial shape possible, but we made some moves over the last year that helped our chances of getting this pre-approval letter.
To increase your chances of pre-approval: save up a big down payment, improve your credit score (check your score now), and improve your debt-to-income ratio by paying down debt, refinancing debt, and increasing your income.
I should also mention that because I’m self-employed, I don’t have a W-2 or paycheck to show the lender. They needed to see two years of tax returns as evidence of my business’s ability to support us.
Further, some people choose to pay themselves a big salary from their business. These folks seems to have an easier job getting past the underwriters to get a loan. If you are self-employed, consider setting yourself up on a salary and receive a W-2.
Our Next Steps
We can now start the process of searching for the right home, as well as preparing our current place to rent out.
It feels a little weird to be excited about being able to go into a massive amount of debt, though. But this is definitely a part of our life plan:
- We rented our first year of marriage
- Purchased a townhome in year two
- Refinanced the townhome mortgage in year four
- Now we’re turning it into a rental and buying a new home
I’m really looking forward to this move. In part because it will be a better fit for our family. A single family home neighborhood comes with schools and parks within walking distance, also a yard. Call me crazy, but I’m so ready to mow some grass.
Have any tips about home mortgage pre-approval?