For those buyers who present you with a pre-approval letter from a mortgage company, how can you know if the pre-approval process was comprehensive enough to assure that you will have a qualified buyer? After all, the proverbial pendulum is still swinging far to the opposite side of where it was in 2005, when all one needed was a "pulse" to qualify for a mortgage.
Most pre-approval letters will state something such as the following:
"Congratulations! You have been pre-approved for a home purchase with a price not to exceed <price> and a loan amount not to exceed <loan amount>, subject to the following conditions..."The condition list can be endless, leaving plenty of room for error on the part of the mortgage originator.
While the majority of mortgage originators will require a credit report as part of the pre-approval process, they may not even look at a pay stub or tax return to determine qualifying income, opting instead to simply base their pre-approval on the borrower's "word" about income, assets and other debt obligations (e.g. alimony or child support which do not show up on a credit report).
If a prospective buyer presents you a pre-approval letter, contact the issuing lender and ask what documents were collected as part of the pre-approval. Here's a short list of documents that are are common:
- Most recent W2 for salaried employees
- Tax Returns; most recent 2 years' for commission/bonus-based employees or self-employed individuals
- Corporate Tax Returns (2 years') for self-employed individuals, depending on how their business is structured (e.g. Sole Proprietorship, Partnership, Subchapter S Corporation, etc.)
- Credit report will show monthly debt obligations, legal judgements, tax liens, etc.
- Divorce decree will dictate alimony and/or child support payments
- Proof of legal residency in the United States
If you have any questions about the pre-approval process, or other real estate finance issues, feel free to contact me at (770) 597-1423.
