Prequalification and Preapproval Documentation Requirements

If you’re looking to buy a home, the amount of paperwork and documentation you’ll need can be intimidating, and it begins as early as the prequalification or preapproval phase. If you’re new to homeowning, you may be confused by the difference between these two stages. This article will break down the differences between them, what paperwork you’ll need to prepare, and what you should know before getting preapproved and prequalified. Understanding what you need ahead of time can minimize surprises or delays in the mortgage process.

Prequalification vs. Preapproval Documentation

Mortgage prequalifications and approvals are often mistaken for one another or used interchangeably, but they’re really two different steps of the mortgage process with their own distinct requirements. Mortgage preapproval takes place closer to when you begin house-hunting, so the information you provide will be more detailed and considered more seriously than what you offer during mortgage prequalification.

These are the most common circumstances you’ll encounter when applying for a mortgage, but requirements will ultimately vary depending on your lender and the type of loan you apply for. At Freedom Mortgage, you can get prequalified online, which does require a hard credit check.

Prequalification and Preapproval Documentation Checklist

Extensive paperwork is required to qualify for a home loan. Preparing the necessary paperwork ahead of the prequalification and preapproval phases can make for a much smoother experience.

1. Personal Identification

Generally, no actual documentation is collected or provided during prequalification. At this stage, you’ll informally identify yourself by providing basic contact and financial information, which your lender just takes at face value. For preapprovals, however, you’ll need to provide a government-issued ID and your SSN for your lender to verify identification.

2. Annual Income

For preapprovals, after identification, you’ll need to verify your income to your lender by providing your recent pay stubs, the prior two years of tax returns, and maybe even bank statements or offer letters. Once they have this information, they review your earnings history to determine how much qualifying income can be used toward a mortgage application. This step in the prequalification process often relies on self-reported information, but you’ll need more substantial documentation to portray your financial situation once you’ve reached the preapproval process.

3. Employment Details

For preapprovals, to verify employment details, lenders may contact your employer directly to confirm what you’ve indicated. If you’re self-employed, prepare to provide business tax returns, profit/loss statements, and possibly an accountant's letter. Next, lenders will likely run your information through a third-party verification vendor, possibly twice to ensure nothing's changed during the time it took to review employment details. Informal prequalification may only require self-reported employment details, although you may still be asked to provide recent pay stubs.

4. Monthly Debt Obligations

Most lenders review both short and long-term debts, which can be defined as any amount of money you owe to creditors that you are required to repay over time, usually with interest. These debts are usually compared against your monthly income to calculate your debt-to-income ratio, (DTI) which lenders use to assess if you can sustain additional debt; for prequalifying, this step can be completed with self-provided information.

A “good” DTI is usually below 45%, so consider paying down other debts to improve your chances of approval.

5. Total Assets and Savings

During a preapproval, your asset, savings, and income data are reviewed by your lender to make sure you can pay a down payment and keep up with monthly payments. Buying a home also comes with closing costs, cash reserves, and additional costs that can quickly add up. Acceptable documentation for this step includes recent bank or investment account statements, or documentation from retirement accounts like 401(k)s and IRAs. Prequalification may be based on your self-reported asset information, but formal preapproval usually requires documentation to confirm the assets and to verify that those funds are available.

6. Credit History and Credit Score

For preapprovals, most lenders will conduct a hard credit inquiry on your credit report. For prequalifications, however, many lenders only do soft credit checks, while some, like Freedom Mortgage, will run a hard inquiry to see what you qualify for.

Additional Documents Required for Mortgage Preapproval or Prequalification

For some transactions, you may need to provide additional paperwork depending on the type of loan you are applying for or your financial circumstances.

• Self-employed borrowers: Self-employed borrowers may need to prepare personal and business tax returns, income forms, balance sheets, profit/loss statements, or an accountant's letter to proceed with their application.
• Current homeowners: If you already own a home, lenders may ask for current mortgage statements, property status and value documents, or property tax records. These documents are used to verify your current housing costs and any rental income.
• Non-conforming or jumbo loan applicants: Non-conforming loan applicants, or borrowers applying for jumbo loans, have a slightly different approval process to prove you can handle the larger loan. Aside from two years of tax returns, you may need to prove you have the funds to fulfill the first 6 or 12 months of your loan, and proof of cash reserves.
• Veterans and active-duty service members: Eligible VA borrowers might be asked to provide proof of military service, and if they’re a former service member, they’ll have to provide a Certificate of Release or Discharge from Active Duty or a DD214 form. Finally, they’ll need a Certificate of Eligibility (COE), which is a form that verifies you’ve met all eligibility requirements to apply for a loan.

Final Thoughts: Home Loan Prequalification Documents

Mortgage prequalification is like an introductory stage with your lender, where you informally explain your financial and personal circumstances for your lender to see if you’d be a good fit. Mortgage preapproval, however, is an involved process with more paperwork. This process and the forms you need to provide can look different for everyone, but regardless of your circumstances, you’ll want to gather documents in advance to keep the process moving smoothly.

If you think you’re ready to begin this process, get prequalified online today to come closer to reaching your financial goals.