Monday, November 14, 2005

Pre-approval eases home purchase

Pre-approval eases home purchase
Process ensures disentanglement of potential snags
By JIM DEBOTH
INTEREST.COM



Few things are more embarrassing or frustrating than picking out something to buy, taking it to the cashier, then lacking the money or credit to pay for it. It's even worse when that something is a home.

One way to avoid the problem is to get pre-approved for a mortgage. This means the lender has verified all the information the borrower has provided -- salary, credit history, down payment amount, and so on -- and issues a letter backing a loan for a certain amount.

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This is not the same thing as being prequalified, however, according to Chantell Myers, a loan processor for Kimberly Financial Services, in Gurnee, Ill. Although some lenders hand out letters saying someone is prequalified, those letters usually are considered useless because they are based solely on the borrower's word.

"We don't use them," she said.

No lender will loan a dime to anyone unless and until they can verify "everything checks out." In fact, many real estate agents won't even show homes to a client until "everything checks out" because they don't want to waste their time.

For this reason, it makes sense to get approval before moving on to house hunting. It could take a month or more to get an approval letter anyway and by that time, the "perfect home" may have been sold to someone else, so it helps to get loan approval from the outset.

Pre-approval requires backing up every claim made to the lender: credit history, pay stubs or IRS W2 forms, bank statements, brokerage or investment accounts, and other paperwork. For the self-employed, the lender will probably want the last three tax returns.

If a large amount of money recently "appeared" in a bank account, the lender might want to know where it came from. If it was a gift from family, for example, they will likely require a letter from the giver saying that it is a gift and not a loan, which may change the borrower's debt load.

They will also want to know how large of a down payment the borrower plans to make, length of employment, time at current residence, monthly bills, and so on.

"The (pre-approval) letter will state what the conditions are, or what's been verified," Myers said. It will say how much the lender who issued it is willing to loan.

The letter will also state the expiration date on the loan guarantee. With some companies, the letter is good for 120 days. For others, it is less.

"The biggest hang-up in getting pre-approved is usually the credit score -- the FICO. And that's based on the credit report," Myers said.

Mistakes are not rare in credit reports and take time to clear up. It requires dealing with the credit-reporting agency and, sometimes, with the company that made the mistake. In any case, it can take 30 days to get a mistake corrected.

Since the lender may use any of the three major credit reporting agencies, it makes sense to check for accuracy with all of them. All consumers may order their credit file for free once per year from each of the big three credit reporting agencies: Equifax, Experian and TransUnion.

Once pre-approved, a borrower should not make any major purchases until after signing the papers for the house, and try not to change jobs. Lenders will sometimes run a final credit check before the loan closes, or make another check on income to see if changes have occurred that would render the borrower less able to make their monthly mortgage payments.


Jim De Both is president of Interest.com -- a national publisher of mortgage rates and information

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