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There are several reasons you should receive pre-approval for your mortgage before shopping for a home. This allows you to know exactly how much you can borrow and makes you more appealing to sellers, who do not have to worry if you are going to get a mortgage in the current competitive New York housing market. Additionally, submitting an offer without pre-approval if you are financing the deal is essentially offering a blank offer that will not be taken seriously. In a competitive situation, this could mean losing the apartment.
Image by Lori Hiscock / Flickr
With low-interest rates and the housing market on stable footing, if you do not have a pre-approval letter, the listing agent and seller do not want to speak to you, according to Gea Elika, Principal Broker, at Elika Real Estate. You need your “ducks in a row,” Elika said.
Sellers want to take the mortgage contingency out as a condition of closing. We highly advise against this unless you can provide for a more substantial down payment or pay for the apartment in cash. However, if you feel you must do so to try to win a bidding war, there is no option without pre-approval.
This means the buyer may be on the hook to pay cash if they cannot get a mortgage. If you are pre-approved, this eliminates the risk you won’t obtain a mortgage, Elika stated.
Pre-qualification is less formal, with the lender using information from the buyer to determine the amount of mortgage you qualify for, without verifying it. Pre-approval is a step further, with the lender checking various items such as your credit score, pay stubs, tax returns, bank statements, and brokerage statements.
We go through the application to make your life easier and smooth the process.
Uniform Residential Loan Application
The Uniform Residential Loan Application, also called Form 1003, is a four-page document. This is the standard form used by virtually all mortgage lenders, so gaining familiarity with the required information is essential.
While the form is short, it includes all the information necessary for the lender to determine whether to extend the loan. There are ten sections, but you do not need to complete all of them at this stage since you are merely finding out how much you can borrow.
Starting off easy
The first section pertains to the type of mortgage and terms. Since you are not applying for the loan at this time, you can skip this part.
Similarly, you do not need to fill out most of Section II, titled Property Information and Purpose of Loan. Most of the information, such as the property address and whether the loan is for a purchase/refinance are not available at this early juncture. However, there are two pieces of information that lenders are interested in at this point. The names the title will be held in and the source of the down payment.
The title question is not as straightforward as it seems. If you are buying the property alone and the title is in your name, this is simple. If you are married, you can put both of your names. Should one of you pass away, the property goes to the other party. However, if one party has poor credit, or there is a complicated family history, you should think about how the title will be held.
Lenders want to know how you are funding the down payment. If it is from your savings, this is straightforward. However, if you are getting the money from a different source, lenders want to know for a variety of reasons. For instance, a gift from a family member is fine, but from others, it may present a problem. If someone is extending a loan to you, lenders want to account for your increased debt.
The third section has to be filled out, but this is necessary information on you and a co-borrower (if there is one). This includes your name, social security (this is one instance where it is not only okay to provide it, but it is a necessity), marital status, dependents, and your current address. If you have been at your present residence for less than two years, your previous address is also required. The same information is needed for a co-borrower, whose income, assets/liabilities, and credit history are also used to determine whether a mortgage will be extended. This is different from a co-signer, who can help you obtain a mortgage, but does not have the same rights, although he/she is on the hook if you cannot make the mortgage payments.
Care should be taken filling out the next three sections, IV-VI. These relate to your employment information, income/expenses, and assets/liabilities.
Section IV is asking you to put down your work history (along with the co-borrower), going back at least two years. This asks for the employer’s name/address, years on the job and in the line of work, your title, the type of business, and phone number. If you are self-employed, there is a box for you to check.
You need to fill out the same information for prior employers if you have been at your current job for less than two years, along with your monthly income.
The next section outlines your monthly income and housing expenses. If you are a salaried employee, this is straightforward. Make sure to include your entire compensation, including bonuses and commissions. For those that are self-employed, make it as accurate as you can. Investment income, such as dividends and interest are also needed. If you own property and receive rental income, report the net amount.
The section includes a space for housing expenses. There are two columns: present and proposed. If you are renting, put down the amount you pay, along with any renters insurance. But, if you own your current apartment, your mortgage, insurance, taxes, and other costs, such as maintenance, are entered. It is a little trickier, but the form also asks for your proposed housing expenses. You can ballpark these based on your budget.
Next, the form asks for your assets and liabilities. For your assets, you need checking/savings accounts (bank names, account numbers, and approximate balances), securities such as stock and bonds, other real estate owned, retirement funds, and any other assets. If you own real estate, you are expected to put in details for each one, such as the address, market value, amount of mortgage, along with the gross rental income, mortgage payment, and insurance/maintenance/taxes to calculate the net rental income
Some banks might have you skip the liability section, preferring to obtain this later when the lender pulls your credit report. You should know your situation with your knowledge, however.
Almost home free
You should be able to fill out the last few sections reasonably quickly. Part VII, Details Of Transaction, can be skipped since these are not available.
Section VIII is a series of five yes/no questions such as if there are any outstanding judgments, declared bankruptcy and if you are a party to a lawsuit.
The last two sections require you to read and sign. You agree that the information is accurate and acknowledge that the lender may verify it. The final part, which is voluntary, asks you to provide information on your ethnicity, race, and sex. If you choose not to provide it, there is a box for you to check.
The application can be filled out and sent back via e-mail or fax. There is likely an option to do it online, too. The pre-approval process does not take long, and you should get a letter in one to two days.. If there are any issues, the banker might need to ask for additional documents.
It behooves you to fill out the information accurately. The information is going to be verified, and any inconsistencies are going to delay your loan approval.
Once you have found an apartment you would like to bid on, you should also keep in mind that the bank needs to approve the building. The lender will look at things such as the building’s financials, vacancy rate, the split between rentals and owner-occupied units, and the amount of commercial space. For a co-op, you need to pass muster with the board, which can be strict, Elika added.