Are you planning to buy a house soon? Congratulations, you're about to embark on one of your life's most significant financial decisions! 

But before you start daydreaming about paint colors and furniture arrangements, you've got to get pre-approved first.

Don't worry, though—obtaining a mortgage pre-approval doesn't have to be overwhelming. 

With our comprehensive checklist, you'll be able to prepare yourself and ensure a smoother process in the months leading up to your mortgage. So, let's make your dream of owning a home a reality.

Step 1: Research Lenders

The first step of your pre-approval journey starts with finding the right lender. Now, there are various types of lenders in the mortgage industry—each with its unique offerings and advantages. 

For example, many mortgage lenders (like those at your local bank) only have access to products offered by their institution, whereas mortgage brokers have access to various loan products from multiple lenders.

To make sure you choose the best loan officer for your situation, make sure to ask them about the following: 

• Their experience: This is especially important for individuals with unique financial needs, such as self-employed individuals or investors. Your lender needs to have a history of working with borrowers like you, so they can navigate roadblocks and provide valuable insights throughout the process.
• Available products/programs: Make sure they have access to a variety of mortgage options that cater to your specific needs.
• Pre-approval process: Each lender has their own requirements, so it's best to know this information so you can prepare.

By getting a good understanding of their experience and available products, you'll be able to find loan officers with a proven track record of working with borrowers in situations similar to yours.

Step 2: Gather Your Proof Of Income

Having your proof of income documents ready before starting the application process will make it go faster and smoother.

Here's what almost every lender will want to see to verify your income and determine what you qualify for:

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Step 3: Draft Personal Asset Statements

Along with proof of income, you'll need to prepare personal asset statements. You'll need this information to prove your financial stability and have the cash to close (down payment and closing costs). 

By organizing and presenting your assets clearly, you can prove you're financially ready and increase your chances of getting pre-approved. Here's what they should include:

• A concise list of all assets and accounts, such as bank statements, money market accounts, CD accounts, brokerage accounts, retirement accounts (401K, IRA, Roth IRA etc.), retirement accounts, real estate properties, and etc.
• The current market value of each asset
• For each account you’ll need two months' most recent asset statements to show proof of funds. 
• A final net worth calculation

Step 4: Work with Your Accountant

Teaming up with your Certified Public Accountant (CPA) is crucial when applying for a mortgage, particularly for self-employed applicants. 

They'll help you optimize your financial profile, giving you better chances of getting your desired mortgage. Here are some ways you can work with them:

• Pre-mortgage planning and tax prep: If you're planning to file taxes before applying for a mortgage, work with your CPA to ensure your reported income is where you need it to be to qualify for the loan amount you want. 
• Self-employed documentation: Your CPA will need to prepare a letter highlighting your ownership percentage, self-employment duration, and whether or not your business is in good standing.
• Expense ratio calculation: They'll help determine the percentage of your income spent on expenses which you can use in lieu of your lender's standard ratio (typically 50%).
• Financial statement review: Your CPA will identify and address potential red flags in your financial statements to reassure lenders of your creditworthiness.

Step 5: Be Aware of Your Debt-to-Income Ratio (DTI)

Your DTI is crucial for mortgage eligibility and overall purchasing power, so it’s a good idea to know where you stand. Ideally, lenders like to see DTIs of 43% or less, but some will let you go as high as 50%.

To calculate your DTI, you'll divide your total monthly debt payments by your total monthly income and multiply it by 100. This will give you your percentage. 

Step 6: Continue Adding to Your Savings

As you get closer to your application (and even after you get pre-approved), it's crucial that you continue to add to your savings. The more money you have at your disposal the better. 

The overwhelming advice is that you need to have 20% down, but in reality, the mortgage program you qualify for will determine the amount you need to put down. 

For example, first time home buyers typically only have to put 3% down on their first mortgage whereas an investor might have to put 15-20%. 

Just bear in mind that your down payment can range anywhere between 3-20%. And if you've been padding your savings, you'll be in good shape.

Step 7: Fill Out Your Pre-Approval Application

Once you've found the perfect lender and gathered everything you need, it's time to fill out your pre-approval application. 

This helps lenders evaluate your creditworthiness, income, and debt levels to determine whether you qualify for a mortgage and how much you can afford.

While each lender will have their own specific requirements, you'll typically have to provide documents that show your income (which is why we had you collect it in the previous step) and other assets you'll use for your purchase. 

If you're self-employed, you may need to provide additional documentation such as profit and loss statements, bank statements, or business tax returns.

At Modern Day Lending, here's what we need for a full documentation pre-approval:

• Last two years' business or personal tax returns
• Most recent 30 days' paystubs (if applicable)
• Last two years' K1 forms (if using business income to qualify)
• Two months' personal or business bank statements
• Two months' most recent OR most recent Quarterly statements for other assets (Brokerage, IRA, 401K, investment accounts, etc.)

For those of you that own any other real estate, you'll also need to provide the following documents:

• Most recent mortgage statement
• HOA information 
• Signed Lease Agreement (if applicable)

However, if you are self-employed and looking to qualify without using your tax returns, here’s what we need:

• 12-24 months business or personal bank statements
• Two months' most recent OR most recent Quarterly statements for other assets (Brokerage, IRA, 401K, investment accounts, etc.)
• The following information about your business: Business name, business description (limit to four sentences), total percentage of ownership, total number of employees.
• A CPA letter stating your percentage ownership of the business, that you have been self employed for at least 2+ years, and that your business is operating and in good standing.

Step 8: Review Your Credit Score With Your Loan Officer

Credit scores help lenders determine how much you qualify for and the rates you will receive for your loan. When you submit your pre-approval application, your loan officer will pull your credit report. 

Depending on the lender, some loan officers may work closely with you to repair your credit, while others might provide guidance on how to enhance your score if you haven't been focusing on optimizing it. 

In either case, here are some tips to improve your credit score:

• Pay all bills on time
• Keep your credit card balances low and avoid maxing them out
• Avoid closing old credit accounts or opening new ones
• Regularly monitor your credit report for errors and address any discrepancies promptly

Moving Forward With Confidence

Now that you know what you need to do in the months before buying your home, you're ready to move forward. 

Taking the next step on your homeownership journey starts with a reliable and experienced lender—and Modern Day Lending is here to help.

With over two decades of experience, our team of mortgage experts is well-equipped to provide exceptional customer service, tailored mortgage solutions, and comprehensive guidance throughout the entire process.  

Don't wait any longer to make your dream home a reality. Contact a mortgage expert and discover the difference our personalized mortgage solutions can make.