Why mortgage preapproval is a must

I’ve written about this before, but I’m going to beat this poor dead horse one more time. When Matt and I start working with new buyers, one of our first recommendations is to meet with an excellent mortgage broker and get pre-approved for a loan. Not just pre-qualified, but fully pre-approved. This means digging up all of your financial paperwork (more on those requirements in a moment), filling out and signing a loan application, and agreeing to a credit check.

There are a few good reasons for going through the pre-approval process BEFORE starting your home search:

1. It tells you what you can comfortably afford. Sure, online mortgage calculators are a good start, but they don’t know what interest rate you will qualify for, they don’t always have accurate property tax estimators, and they can’t give an illustration of how the tax benefits of home ownership will affect you take-home pay each month.

2. Knowing your financial comfort zone lets you search for places you can actually afford. It’s never good to make a good guess about what you can afford and start looking, only to find and fall in love with your dream house…then find out that it’s out of your price range. This is not just an emotional roller coaster that you need not board; it’s a waste of your time.

3. When you find a home you like and want to write an offer, you can do so right away. Our market in San Francisco is quite a mixed bag these days, with some properties sitting for weeks and others selling within a day or two of going on the market. If your financial ducks are in a row, you can focus on evaluating comps with your agent and determining your offer price instead of excavating all the required paperwork and starting from scratch to get preapproved.

“But I’m so organized! And I can put it all together in five minutes!” You might be thinking these things. And I understand…but remember that your mad organization skills and ability to put together a sizable chunk of your financial paperwork is just one part of the equation. Remember that your mortgage broker has to process all that stuff, and that doesn’t happen in five minutes.

What do you need for pre-approval? Here’s a list of most items that can be required (these don’t apply to all buyers, but it gives you an idea of what’s needed):

1. Two most recent paystubs

2. W-2s for 2009 and 2010

3. Two most recent statements for all accounts (checking, savings, CDs, money market and/or securities brokerage accounts)

4. Most recent statements for all retirement accounts (IRAs, SEP-IRAs, 401(k)s or 403(b)s)

5. Most recent statements of stock options, employee stock option purchase plans, etc. if you are using these for part of the down payment or closing costs.

6. 2009 and 2010 Form 1040s (federal tax returns), all pages.

7. YTD profit & loss statement if you are self-employed.

8. Any and all 2009 and 2010 K-1s, partnership returns, or corporate returns.

9. Mortgage, real estate tax, and insurance premium statements for all properties you currently own.

10. Leases on all rental properties you own.

11. Complete bankruptcy papers, if applicable.

12. Divorce decree and settlement, if applicable.

13. If not a US citizen, copy of resident alien card, or resident alien application or H1B or L1 visa plus passport

14. Name, address, and phone number of your landlord(s) for the last 24 months.

15. 12 most recent cancelled rent checks or bank statements if your landlord is a private party.

16. Copy of your driver’s license or passport and your date of birth (Patriot Act requirements).

17. Copy of current mortgage statements on all outstanding mortgages.

You owe it to yourself to get this part of the process done so you can focus on the fun part — finding your new home!