The Pre-Approval Process

Once you have shopped around and found a bank that you like, you should go ahead and get pre-qualified for a loan. This process is fairly easy and does not involve any paperwork. Sometimes, a banker may even do this over the phone and usually only takes a few minutes.

Getting pre-qualified tells the real estate agent and the seller that you are serious about buying a house. The banker will give you an idea of how much you can pay for a house. This is usually based on statements that you make such as your income, assets and expenses.

One formula that many banks use to determine what amount you can pay is the 28/41 rule. The 28 in the formula means that your house payment cannot be more than 28% of your gross monthly income (before anything is taken out of your paycheck). For example, if your gross monthly income is $3,000, your payment cannot be more than $840 ($3,000 x .28).

The 41 in the formula means that your total payments cannot be more than 41% of your gross monthly income. As in the previous example, if your gross monthly income is $3,000 your total payments (car, credit cards, house) cannot be more than $1,230 ($3,000 x .41). This does not include utilities, insurance, etc. Your banker will explain all of this to you.

Pre-qualified and pre-approved are two different things, although many people interchange the terms.

When you are ready to find a house, you should go ahead and get pre-approved. The banker will require you to bring a few items with you to an appointment. These items include:

• Your driver's license for verification of identity.
• Your most recent pay stubs - usually the last two.
• A copy of your last bank statements. This includes your checking and savings account as well as any other accounts you have.
• Your last tax return and W-2 statements.
• Proof of any stocks or bonds or any retirement accounts.
• Credit report fee and any application fee. Some lenders do not charge an application fee.

After the banker has looked you over and likes what he sees, you will receive a good faith estimate which will tell you the terms of the loan such as interest rate, closing costs, term of loan, and type of loan.

I recommend that you shop around and get a couple of estimates from different banks. Even a small difference in interest rates can make a big difference over the term of a loan.

Although you have been pre-approved for a loan, it does not mean that you will get the loan. A bank usually will not guarantee that you will get the loan until a house has been appraised. An appraisal will protect the bank if your were to default on the loan. The property must also have a clear title, which means there are no liens on it.

Although buying a house can be stressful, if you have the necessary documents and there are no problems associated with the property, it can be a smooth process.