Let’s assume that you are in the category of buyers who need to find a property now and who must also get a mortgage to finance the deal. What can you do to improve your chances that will set you above competing buyers? The first step will be to get financing in place before you make your purchase oﬀer. There are three ways to do this: ask your lender for a “pre-approval” for a loan up to a certain amount; apply to get “pre-qualified”or (and the best option) is to be get a “TBD” approval.
- Pre-approval: You will turn in an oﬃcial mortgage application and will provide the lender with your financial documentation – including having your credit pulled. The lender will examine the documents to confirm that the information in the application matches the actual documents collected. The bank will determine the program types and maximum payment you will be approved for. A pre-approval is not a guaranty for a mortgage as you still need to have an underwriter sign oﬀ on all items for final approval. It does not include and appraisal or title work.
- Pre-qualification: This is the easiest and quickest method to get an idea of what you can aﬀord for a property purchase. Keep in mind, however, that this approval carries the least amount of weight for your oﬀer. It does not include a credit check and it is not a firm loan commitment by the lender.
- TBD Approval: To-Be-Determined (TBD) approvals are the strongest and best method to use for your pre-approval loan process. Your loan file will be underwritten to the furthest extent possible and you do not have to identify a specific property. The lender will ask for a complete loan application—including income, assets and liabilities. If your financial picture meets the lender’s criteria, you will be given a “hard approval” for the maximum monthly mortgage payment allowed. The process may take a few days but allows you to guarantee a quick closing to the seller and set you above other potential buyers with lesser approval letters.
Documents Needed for a TBD Approval Letter
Tax returns: Copies of your two most-recent federal and state tax returns
W-2 wage earners: Copies of your two most recent payroll stubs.
Self-employed, freelancers and independent contractors: Up to-date profit and Loss statement and two years of records, including Form 1099s
Real estate income: Rental income, address, lease and current market value
Bank statements: Two months of statements
Retirement and brokerage accounts: Two months of statements
Personal Property: Include your car, furniture, jewelry, or valuable collections such as art work, antique cars, cameras, and so forth.
Monthly debt payments: Lenders use this total amount to calculate you debt-to- income ratio. Include any recurring monthly payments such as health insurance, car payments, minimum payments on credit cards, utility bills, car insurance, etc.
Divorce: Your lender may ask for a copy of your court divorce decree and any child support or alimony payments if applicable.
Bankruptcy and foreclosure: Ask your lender what documents they may need and how long you need to wait after bankruptcy or foreclosure to be eligible to apply for the loan.
Down payment gift letters: Lenders will want to see the sources of the money you plan to use for the downpayment. If that includes gifts, get a letter from your donors to show they don’t expect to be paid back.