A Guide to Pre-Approval for First-Time Home Buyers in Charleston, South Carolina

For first-time homebuyers, one of the last things you want happening is to find an amazing home only to discover you can't afford it based on the amount a mortgage lender is willing to loan you. The pandemic has made being prepared and ready with an offer crucial to the home-buying process. Available home inventory is at all-time lows and homes that hit the market go quickly. Receiving a mortgage pre-approval prevents you from being house-poor, keeps your monthly mortgage payments manageable, and can put you at the front of the line when making an offer on the house of your dreams.

What is Pre-Approval in the First Place?

In the most basic terms, mortgage pre-approval is when a mortgage lender provides a written statement that the approved party or parties will be granted a loan amount pending approval from the underwriter.

A more detailed definition from Realtor.com is when, "...a lender probes deep into your financial past, checking out your income via W-2s, debt-to-income ratio, credit score, credit report, and other factors that help it determine whether or not to give you a mortgage loan and how much money you stand to get." [Realtor.com]

Why is Pre-Approval So Important for Home Buyers, In General?

For a home buyer, pre-approval is important so you know the price range you're qualified for. It eliminates the guessing game and allows you to focus on appropriately priced homes. And just as important, that written statement from a mortgage lender (also known as a pre-approval letter) can strengthen a buyer's offer, making it more attractive to a seller. An above asking-price offer from someone without a pre-approval letter can be less attractive than one at or below the asking price from someone with pre-approval in hand. The seller knows that issues arising during the negotiation stage are likely decreased because the buyer's taken the time to qualify for the purchase of the home.

 "[Pre-Approval] eliminates the guessing game and allows you to focus on appropriately priced homes."

Why is Pre-Approval Important Specifically for First-Time Home Buyers?

For first-time home buyers, pre-approval is important for the same reasons mentioned above. But, knowing how much home you can afford and tempering your expectations make your home search a much smoother process. There could be some credit issues that need to be cleared up in some cases, so it's better to know this at the beginning of the process.

What Are the Steps of the Pre-Approval Process?

The process of getting pre-approval doesn't have to be difficult and confusing. It's simply a matter of having your required documentation ready. There are 5 types of information regularly required to get a mortgage pre-approval. Once you contact the mortgage lender, the following information is usually going to be requested:

1. Proof of Income

The two most recent years' tax returns, W-2 wage statements from the previous 2 years, recent pay stubs that show income including year-to-date income, and proof of any additional income sources like bonuses, alimony, side-hustles, etc.

2. Proof of Assets

As the borrower, you'll need to prove to your lender that you have adequate funds to make the downpayment and cover the closing costs of the home. Bank and investment statements will be required and also provide proof you have cash reserves. The percentage of the downpayment will vary by loan type, but the standard is typically 20% of the home's sale price. If your financial situation makes a 20% deposit unlikely, most borrowers will require you to purchase PMI, private mortgage insurance, a mortgage insurance premium, or a funding fee. A buyer's FICO credit score and debt-to-income ratio (DTI) are also factors in pre-approval. Also, if a friend or family member is helping you with your downpayment, you'll most likely need a letter from them stating the funds are a gift and not a loan to avoid adding to your perceived debt.

3. Good Credit

Credit scores of 620 or higher are usually required to get a conventional loan with scores 760 and higher reserved for the lowest interest rates. If you're considering an FHA loan, the folks from The Mortgage Reports say, "Although FHA allows credit scores as low as 580, lenders may set their own, tougher guidelines...and credit requirements may be subject to change from time to time, as we saw at the height of the pandemic." [themortgagereports.com]

However, just because your credit is less than ideal doesn't mean a loan or pre-approval is out of the question. Most lenders will work with buyers that have low credit scores to suggest ways to improve their scores over time. Buyers with lower credit scores typically must make larger downpayments, so keep that in mind.

4. Employment Verification

The main reason lenders require employment verification is to make sure the borrower has steady employment. Pay stubs are one requirement, but lenders may also call the employer to verify, even calling your previous employer if you've recently changed jobs. If you're self-employed that's no problem,  it'll just require a bit more paperwork proving the stability of your industry, your income, and the likelihood the revenue will remain consistent.

5. Other Documentation

Your driver's license, social security number, and a signature will be required to pull your credit report. In some situations, additional information may be needed and simply being flexible to locate the information promptly will make for a smooth pre-approval process.

Does Buying a Home in the Lowcountry Affect the Pre-Approval Process?

Whether you're looking for a home in Mount Pleasant, Summerville, Goose Creek, West Ashley, or other locations in the Lowcountry, the above process is no different. However, the final monthly payment COULD be affected based on the location of the home. Taxes and insurance will play a role in the monthly payments and those things can be affected depending on the area of the Lowcountry where you're doing your home search. A lender will estimate these numbers for you based on the price range. Some locations will have higher insurance rates than others and will affect those monthly payments. The same goes for regime fees for condos, so it's important to keep these things in mind as it could create payments that you as the buyer are not qualified for.

"Taxes and insurance will play a role in the monthly payments and those things can be affected depending on the area of the Lowcountry you're doing your home search."

What is the next step after a first-time homebuyer receives pre-approval?

Based on your time frame for purchasing a home, you should start the home search once you receive your pre-approval letter. In the current market, a home seller is not going to readily consider a contract with a long closing time. Sellers will be looking for 45 days or less to close once an offer is accepted. If a first-time buyer is in a lease, the time frame needs to reflect that. Today, a home on the market won't be available if the buyer needs to wait for the lease to end to close on the home. 

Additional Information Important for First-Time Home Buyers

Among a few common mistakes first-time homebuyers make, not paying attention to your debt-to-income ratio is one of the biggest. Some buyers will qualify but by a very small margin. It's important to pay bills on time and not add to your debt if you're actively looking to purchase a home. Even after you've been pre-approved, making large purchases such as a car or even appliances for your new home can cause issues once the official loan process is underway. It's best to check with your lender before purchasing anything with credit once you've been pre-approved, just to be safe. 

"It's best to check with your lender before purchasing anything with credit once you've been pre-approved, just to be safe. "

As mentioned before, a buyer may have funds gifted to them by a family member to assist with the home purchase. Make sure this is known at the beginning of the pre-approval process. Your mortgage lender will know the proper steps for gifting funds.

Finally, you don't have to go through this process alone. A licensed Realtor® will be able to help you through the process to avoid obstacles and stress in this crucial first step to buying a home. If you're considering taking the first step in buying your first home, contact me today to discuss options.