The mortgage prequalification process is the first step on the road to buying your first home. Your banker will ask for several documents from you to gather a more complete picture of your financial situation. Home loans in 2012 include real underwriting, with someone looking into you in far more detail than they would if you are applying for a credit card or an auto loan. I just started this process and my bank has asked for the following items to complete a home loan prequalification:
*Complete Loan Application with current information
*Paycheck stubs from the past 30 days that show YTD totals
*Original W2’s for the past two years
*2011/2010 Signed Federal Tax returns if self employed, commissioned employee, receive rental income, or need overtime to qualify. If self employed please provide past 2 years of business income tax returns.
*Past two months bank statements showing CASH assets (ALL PAGES)
*Statements from 401K, CD’s, IRA’s, Stock, Bonds, etc. If using 401K funds for down payment, please provide a plan summary description of your 401K showing loan terms.
*Home Owners Insurance Policy Declaration Page (current)
How to Gather All the Needed Documents
Set aside at least one interrupted hour at home to get this done. Your W-2’s are probably in a file somewhere, and you don’t want to print your tax returns and other sensitive documents at work or at the library where the downloaded version of that file may get stored on a shared computer. Next thing you know you’re opening a retail credit card at a Cabela’s in West Virginia to purchase five different shotguns. Why your coworker stole your information for such a bizarre reason, I DON’T KNOW. He probably just sells that stuff online, so be guarded with personal information and financial documents.
With the exception of the last item on the checklist which doesn’t apply to first-time homebuyers, I’ve gathered all of the items above to give to my bank for the big number “reveal”. I am waiting about six weeks from when I paid off my car so that that paid-off account will be reflected on my credit and to give myself a chance to rebuild some savings again. Even though I am not handing anything in yet, seeing all those documents in one place was a real eye-opener! I’ve been tracking my spending, paying down close to $2,000 in debt every month, checking into Quicken, and just being a lot more conscious about money, but I still had no idea how the whole situation looked until I was staring at my stack of paystubs, tax returns, bank statements and retirement accounts in one place. Your bank statement hides NOTHING. Example: Deposits: $1,000 Withdrawals: $960. My net income was $40?!! Let me just say that I have not spent more than a dollar a day on food since I put this thing together. My credit score is pretty good at around 750, but I’d love to get it higher by the time I have an offer accepted on a place and need to fund a loan. I’ve never made a late payment and don’t have any recent hard inquiries on my credit score, so the reason my score isn’t better is because of my credit card balances, which are already my first priority. Paying down my balances will reduce the credit utilization ratio, improve my score and free up cash! Two birds, baby.
Why Prequalification Matters
The prequalification process is really important. First, it pushes you to get serious about all this homebuyin’ talk. I’ve been wanting to own real estate since I was about 12…and yet I did not take any real action to make that happen until 2011. Now that my situation is finally improving, a prequalification will tell me what the bank thinks I can afford. My banker (I know, sounds cheesy, but I always befriend my bankers) has said I will probably qualify for something around $250K, but it’s time to find out for sure. And that’s their number. Second, you decide what your budget is based on what you’ve qualified for and what you understand about your situation and your goals for the home. I want to be well below whatever I prequalify for. I’m just looking for a decent condo in a working-class neighborhood that needs plenty of renovation (since I have access to construction professionals within my family and close friends, not to mention myself) that will make sense as a rental in the long-term. That is definitely NOT a brand new condo in Irvine for over $300K. It’s the harder-to-find but still out there older homes in North Orange County (the area I think I am going for, as of now). Third, you can start assessing the market with a good real estate agent who knows your preferred area. Your agent will take you seriously with a prequal letter. Not to mention that many agents won’t even start showing you around without a prequalification. They don’t want to waste their time.
All this wanting to buy and get serious reminded me of the first episode of Party Down, at the Willow Canyon Homeowners Annual Party. Henry’s back as a bartender (after not making it as an actor) for the Party Down catering company. The homeowner husband has been feeling particularly trapped in his suburban nightmare all night as he mingles with homeowner neighbors in his spacious home with the swimming pool, all while wearing pleated shorts:
Homeowner: (leaning dejectedly against the bar) Bet this is a laugh to you.
Henry: Actually, it looks pretty appealing. Yeah, I kind of wish I was you right now.
Homeowner: Come on! You did the right thing, being an actor. You went for it! You’re not someone who does the same shit day in, day out, wearing pleated shorts…I wasn’t always like this. I coulda been you! I was in a band, living crazy…you know when was the last time I did anything unexpected?…(whispers) Cancun!
Henry: OK, but, you know…you have a house! You have a family. You have a life. You know what I’d give for that?
Homeowner: (Makes a face and mimes jerking off for an extended period)
And I know how Henry feels. It’s a weird place to be to have never thought about stability and settling down, and then deciding that you want those things after all. You have a house! Yeah, I want that. It’s going to be a long process, but I’m ready to do it. The benefits outweigh the costs and the fear of a potential rejection (“Congratulations, you’ve been pre-approved for a $15,000 mortgage.”) I’ll figure my way around those (Get 30 friends to go in on a place at $15K each!) and I will learn a ton in this process to share here and make the average consumer more savvy and informed. Because if there is one thing that will hurt you the most in the homebuying process, it will be lack of information.