How Should I Prepare Before Meeting with a Mortgage Broker?

Bring records of your last two years of work and income, your latest pay stub and W-2s, two months of bank statements, and a list of your monthly debts, and decide on a price range, a down payment, and how long you expect to keep the loan. Expect to give your Social Security number so the broker can pull your credit report. On a purchase or refinance loan, until you receive a Loan Estimate, the standard form showing a loan's rate and costs, and tell the broker you want to go ahead, the only fee it may charge is a reasonable fee for that credit report.

Documents to gather

The lender that underwrites your loan (reviews and approves it) sets the final list and can ask for more. These standards from Fannie Mae's Selling Guide and the Federal Housing Administration's (FHA) handbook cover most applications:

If you are self-employed, bring two years of personal federal tax returns with all schedules, two years of business returns, and a year-to-date profit and loss statement. Under FHA's rules, for example, the lender needs the profit and loss statement once more than a calendar quarter has passed since your last tax year ended, along with a balance sheet (a list of business assets and debts) unless you report business income on Schedule C, the IRS form for sole proprietors. It can skip the business returns only if your personal returns show rising self-employment income, your closing money is not coming from a business account, and the loan is not a cash-out refinance (one that pays you cash beyond the old balance).

What the broker needs before it can give you a Loan Estimate

Under Regulation Z, the federal Truth in Lending rules, you have applied once the broker has six items: your name, your income, your Social Security number (to pull your credit report), the property address, an estimate of the property's value, and the loan amount you want. The broker or lender then has three business days to deliver or mail your Loan Estimate. Until you have it, the broker cannot require documents that verify your information, such as pay stubs or bank statements, so you can bring the records above to the first meeting but do not have to hand them over to get a Loan Estimate.

If you have not found a home yet, you cannot give a property address, so the three-day deadline has not started. The broker can still review your finances and issue a prequalification or preapproval letter, covered below.

The Consumer Financial Protection Bureau's (CFPB) home loan toolkit says most credit scoring models let you shop for a mortgage within a set period, generally 14 to 45 days, with little or no effect on your scores. Have every broker and lender check your credit within 14 days to stay inside the shortest window. If your score is low or you have a past bankruptcy or foreclosure, tell the broker before it pulls your credit; using a broker with bad credit explains the program minimums a broker cannot get around.

Decide your loan goals before the meeting

Monthly payment and price range. The toolkit's worksheet adds principal and interest, mortgage insurance, property taxes, homeowner's insurance, and any homeowners association (HOA) or condo fees to estimate your total monthly payment. Its rule of thumb is a total payment at or below 28 percent of your monthly income before taxes, though lenders might approve you for more or less. At $7,500 a month in gross income, 28 percent is $2,100. Lenders also cap your total debts as a share of income, which how debt-to-income ratio works explains.

Down payment. The toolkit says 20 percent or more down likely brings the best rates and most options, and that with 5 to 19 percent down, lenders most likely require private mortgage insurance (PMI), which protects the lender if you stop paying. It lists FHA loans with 3.5 percent down, VA loans with no down payment for qualifying veterans, and U.S. Department of Agriculture (USDA) loans with no down payment for eligible borrowers in rural areas. FHA's 3.5 percent requires a credit score of 580 or higher; from 500 to 579, the minimum is 10 percent. On a $350,000 home, 20 percent is $70,000 and 3.5 percent is $12,250, with closing costs on top of either.

How long you will keep the loan. A point is 1 percent of the loan amount, paid at closing for a lower rate. In the toolkit's example, a borrower with a $180,000, 30-year fixed loan pays $675 in points to get 4.875 percent instead of 5.0 percent and pays $14 less each month. Monthly principal and interest is about $966 at 5.0 percent and $953 at 4.875 percent. After 37 payments, the lower payment has saved about $507 and the loan balance is about $185 lower, together about $692, just over the $675 paid. If you expect to sell or refinance before then, the zero-point loan, or one with lender credits that pay part of your closing costs in exchange for a higher rate, costs less in this example.

What to ask before the meeting ends

1. Which letter you will get. The CFPB says neither a prequalification letter nor a preapproval letter is a guaranteed loan offer, and some lenders issue a prequalification based on information you report but a preapproval only after verifying it. Ask which one you are getting and which documents it relied on.
2. When the Loan Estimate will arrive. Ask for every Loan Estimate in writing so you can compare it with other offers, using the steps in how to decide which mortgage broker to use.
3. What to avoid until closing. The toolkit warns that even financing a new refrigerator could make it harder to get a mortgage, and FHA lenders, for example, must recheck your employment within 10 days before you sign the note (your promise to repay). Ask the broker before you open any new credit account or change jobs.

The steps after you apply, from underwriting to closing, are laid out in what the mortgage approval process looks like. For how a broker's offer compares with banks and direct lenders, see how to choose the best lender for your mortgage.