Now you have put some feelers out there, found some pre-foreclosure leads, and researched the neighborhood, you want to know how much property you can afford. A pre-approval letter will give you your max borrowing amount, and from there you can decide on your budget.
Of course, you don’t have to buy a house for the full amount of the pre-approval letter. It’s meant to represent your max borrowing amount and you can use it to set your own house budget. A pre-approval letter not only sets your max borrowing amount, but it lets the seller know that you’re a serious, qualified buyer, and most realtors and agents won’t even work with you without a pre-approval letter.
You can find a loan through the following:
A permanent loan through a bank or credit union where you already have a relationship
A short term rehab loan through a hard money lender, using this nationwide hard money lender directory
A referral from your realtor, attorney or accountant
The type of lender you work with will depend on the condition and type of the property. For example, a hard money lender will finance a pre-foreclosure in poor condition, while a conforming lender will finance a property in good condition. If the pre-foreclosure is an apartment building then you will need an apartment building loan issued by a lender familiar with commercial loans.
Something that all lenders usually look at is your Debt-to-Income(DTI) ratio and that will help dictate your max borrowing amount, or the amount listed on your pre approval letter. The lender will also want to see a specific amount of cash reserves.
Keep in mind that depending on your strategy, you may have to factor in other expenses such as a renovation budget as well as any holding costs. These are important components to consider when buying a pre-foreclosure home to ensure you’re borrowing enough.
Documents Needed for a Pre-approval Letter
A pre-approval letter is important for two reasons. It tells you how much money you can borrow and what the general terms are such as when the letter expires (usually 30 days), interest rate and down payment required. It also shows the seller and their REALTOR® that you’re qualified to purchase the property.
You will generally need the following in order to receive a pre-approval letter:
Identification, such as a driver’s license, plus…
Purchase:
- W-2’s for the past two years and complete tax returns.
- Most recent pay stubs covering last 30 days.
- Landlord information.
- Last 2 months bank statements of all checking, savings, and asset accounts.
- Names, addresses, and account numbers of all creditors.
- Certificate of eligibility and I or DD214’s (VA only)
- Bankruptcy papers if applicable.
- Divorce decree if applicable.
Refinance:
- Mortgage Statements
- Homeowners Insurance
Of course, the specific documentation needed will depend on the type of loan you’re getting and the lender you’re working with. If you’re a fix and flip investor, it’s probably a good idea to check out our article on the best hard money lenders. If you’re a long term investor and you don’t need to renovate your pre-foreclosure, it’s best to look for a more traditional loan with an established lender.