Before you go to an open house and fall in love with a new home, you should check with a mortgage broker first. Why?

First, they will discuss loan options and what works best for your budget.

Second, the broker will check on your credit and alert the would-be buyers to any problems.

Third, you will learn the maximum you can borrow and therefore have an idea of a price range.

Lastly, in today's seller's market, home sellers expect all buyers to have a pre-approval letter and are more willing to negotiate with people who have proof that they can obtain financing.

Pre-qualification Vs. Pre-approval

A mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on  your home, but a pre-approval is much more valuable because this means  the lender has actually checked your credit and verified your  documentation to approve a specific loan amount (usually for a  particular time period such as 90 days). Final loan approval occurs when  you have an appraisal done and the loan is applied to a particular property. (Learn more by reading Pre-Qualified vs. Pre-Approved – What's The Difference?)

1. Proof of Income

"No verification" or "no documentation" loans are a thing of the past, so all borrowers need to be prepared with W-2 statements from the past two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses and your two most recent years of tax returns.

2. Proof of Assets

You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs, as well as cash reserves. An FHA loan requires a down payment of as low as 3.5% of the cost of the home,  while conventional home loans require 10% to 20%, depending on the loan  program. If you receive money from a friend or relative to assist with  the down payment, you will need a gift letter to prove that this is not a loan.

3. Good Credit

Most lenders today reserve the lowest interest rates for customers with a credit score of 740 or above. Below that, borrowers may have to pay a little more in interest or pay additional discount points to lower the rate. FHA loan guidelines have tightened in recent months, too, so that borrowers  with a credit score below 580 are required to make a larger down  payment. Most lenders require a credit score of 620 or above in order to  approve an FHA loan. Lenders will often work with borrowers with a low  or moderately low credit score and suggest ways they can improve their  score.

4. Employment Verification

Your lender will not only want to see your pay stubs, but is also  likely to call your employer to verify that you are still employed and  to check on your salary. If you have recently changed jobs, a lender may  want to contact your previous employer. Lenders today want to make sure  they are loaning only to borrowers with stable employment. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.

5. Documentation

Your lender will need to copy your driver's license and will need your Social Security number and your signature allowing the lender to pull a credit report.  Be prepared at the pre-approval session and later to provide (as  quickly as possible) any additional paperwork requested by the lender.  The more cooperative you are, the smoother the mortgage process will be.

Next steps

Once you have gathered all the required documentation, it is time to look and apply for the best mortgage rates in your area.

The Bottom Line

Consulting with a lender before you start the home buying process can  save a lot of heartache later, so gather your paperwork or print some  recent statements off your online bank accounts before your pre-approval  appointment and before you begin house hunting.

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