When you shop for a home, sellers and realtors prefer to see a pre-approval letter. This is like an invitation to view the home. In fact, some sellers and realtors often refuse to show a home to unqualified borrowers. This includes those who did not get pre-approved for a loan before looking at homes. You might think it is unfair that sellers would not let you at least see a house, but it makes sense. They do not want to waste their time or yours. If you cannot secure financing, there is no reason for you to see the house. This is why, even if you need a subprime loan, you should secure a pre-approval first.
Know What you Can Afford
A major benefit of getting pre-approved for any loan is knowing what you can afford. You might think you know how much mortgage you want to pay each month, but a bank must qualify you. If you do not qualify for funding, you will not get the mortgage. Taking the time to obtain a pre-approval allows you to know what you can afford. This way you can tailor your house shopping to those homes within your budget. You can also make sure you do not bid too much on a home. Most sellers/realtors will not accept a bid without a pre-approval in the first place, but just in case, you should know how much money you can borrow.
Learn What you Should Fix on Your Credit
Subprime loans cater to borrowers with lower credit scores. This does not mean you can go and mess up your credit after you obtain a pre-approval, though. On the contrary, a lender can give you advice on how to keep your score where it is at or even increase it. The last thing you want is a lower credit score when your file goes to underwriting. This will not happen until you sign a purchase contract and have a property to appraise. Every lender is different, but most pull your credit again in underwriting and one more time before you close on the loan. This shows the lender whether you took out any new credit or made any financial mistakes since you applied for the mortgage.
You might be surprised at the tips you receive. For example, if you have collections, the lender may suggest you wait until the closing day to pay them. If a stipulation of the loan’s funding is for you to pay the collections, waiting until closing day protects your credit. Collections that are more than 2 years old do not affect your credit score. However, if you pay them off after that time, they “reactivate” which could lower your score. Waiting until the closing day will not affect your funding as it takes a while for your credit score to decrease from any new activity.
Get the Extra Steps out of the Way
Oftentimes, subprime loans require more documentation. Starting off, the lender will likely ask for the standard documentation, such as:
- Last 2 paystubs covering the last month of employment
- Last 2 years’ tax returns if you are self-employed or work on commission
- Last 2 years’ W-2s for your employment
- Copy of your asset statements
If you are truly a subprime borrower, though, you likely have special circumstances on your credit report and/or income. This may prompt the lender to ask for more documentation. Things like collections or judgments make require a Letter of Explanation. This is a letter you write explaining the circumstances of the collection or judgment and what you have done to improve your financial situation. They may also ask for more documentation regarding your employment, income, or even your assets if anything looks questionable. Getting these things out of the way during the pre-approval process can help speed along the actual funding of your loan once you find a home.
Getting Pre-Approved is Smart
No matter what type of loan you get, getting pre-approved just makes sense. It gets the initial work out the way and lets you know where you are headed. If a lender has a serious problem with your application, they will let you know up front. This way there are no ugly surprises when you get to underwriting and what you would hope is the final approval stage of your loan. Knowing before you even shop for a home what you are up against can help you make the right choices.
Subprime lending is not a bad thing and it does not mean you will have to jump through hoops all of the time. There are just some special circumstances that make things a little more difficult, such as bankruptcies, foreclosures, and collections. Maybe you had a one-time occurrence where you lost your income due to a health issue or sudden job loss. This is easily explained to the lender. You can also easily prove how you have bounced back. The key is this takes time to prove and the sooner you do it, the better of you will be in the long run.
If you have not gotten pre-approved for a loan and you plan on shopping for a home, we suggest taking this step first. It really takes away a lot of the headaches involved in buying a home. Sellers will take your bid more seriously and you will get to the closing table faster. Once you find a home, the clock starts ticking. The seller wants to know within a short time that you have proper financing. Getting the preliminary work out of the way can make this a possibility for you. This is not to say you cannot buy a house with the preapproval, but it is definitely easier when you have one. This way you get to enjoy the home buying process rather than worrying whether or not you will be able to buy the home with your chosen financing method.