How to Get Pre-Approved for a Mortgage

Getting Pre-Approved for a Mortgage: Step by Step

One of the first things a person would do in a homebuying process is pre-approve for a mortgage. It will give you a clear idea of how much money you can borrow, make you a very attractive buyer and help you focus only on homes within your price range. Pre-approval also gives an indication to the seller that you are a ready, serious, and qualified buyer which would give you an upper hand in very competitive markets. In this article, we are going to take you through the step-by-step process of pre-approving a mortgage starting with your financial document preparation and how you should choose the right lender.

1. Know What Pre-Approval Is

Before getting onto the pre-approval journey, you must first understand what pre-approval is. A mortgage pre-approval is an evaluation by a lender as to whether you qualify for a loan and how much you'll be approved for and what interest rate you could expect to get. Pre-qualification is just an informal evaluation of the likely amount of borrowing capacity you might have but does not do a full examination of your finances, credit check, or consider your income or DTI level.

A pre-approval binds the lender to lend you the money, assuming your financial circumstances do not change and that the home appraisal is satisfactory for the lender's criteria.

pre-approved for a mortgage

2. Credit Score Appraisal

Also, your credit score is going to be of paramount importance in the process of mortgage pre-approving. Your credit score is going to be used by the lender in determining how much of a risk you are to them as a borrower, so they can set the interest rates. Generally, the higher credit score enables you to qualify for better rates and which might enable you to save thousands of dollars in the long run along your loan life. While most conventional lenders require at least a 620 credit score, and the process can be applied to most privately funded mortgages, FHA loans sometimes accept scores as low as 580.

Before the pre-approvals, get your credit score and then review for any errors or mistakes that could lower the score. If scores are low, take appropriate measures by paying down on debts, paying off on time, and not taking on too much credit.

3. Document your finances

You will be needed to provide documentation that verifies your financial situation when you apply for mortgage pre-approval. Income, assets, debts, and the history of employment should be proven by the lender to ensure that you can afford the mortgage. Here are some of the common documents you would need:

Pay stubs: Normally the last 30 days' worth

W-2 forms: The two years' worth, to verify that you have been employed for most of this period.

Tax returns: Typically the last two years, especially for self-employed individuals or those who have side income.

Bank statements: typically the last two to three months of your savings and checking accounts. This evidence goes in to substantiate that you have enough money for a down payment and for closing costs.

Other documentation: You will need evidence of additional income if you receive income from investments, alimony or child support, or other means.

List of debts: Car loans, student loans, credit card debt, and all other monthly obligations.

All these documents will be ready, making it easier for the lender to assess your pre-approval process.

mortgage pre-approvall

4. Your DTI or debt-to-income will be used as a determining factor by lenders regarding whether you have a chance at a mortgage. This is a percentage of your income that you pay towards your monthly debts. The lower your DTI, the more attractive to the lenders you will be. Mostly, lenders prefer the DTI 43% or less, meaning you should not exceed and pay more than 43% of your gross monthly income for any total monthly debt repayments.

To determine your DTI, divide total monthly payments on debt (with estimated mortgage payment included) by gross monthly income. If you have too high a DTI, you'll need to pay down some of your existing debts before applying for pre-approval.

5. Select the Right Loan Type

There exist different types of mortgages which have various advantages and obligations. Knowing them can help you in the selection of an appropriate loan that would suit your fiscal condition.

Conventional loans: These loans are not government loans and generally require a higher credit score than other types of loans (over 620) and a larger down payment of 5-20%. They have good interest rates and hence are highly in demand for consumers who have an excellent credit score.

FHA loans: These are insured by the Federal Housing Administration. These have lower down payments, sometimes as low as 3.5%. It is for a first-time homebuyer or for anyone who has a not-so-good credit history.

VA loans: Guaranteed under the program of the Veterans Administration, these often have no down payment, no private mortgage insurance, and preferred terms for those who served in the armed forces, currently or formerly.

USDA Loans: These home loans are available for single-family homes in rural areas and no down-payment financing to eligible homebuyers who have moderate incomes.

The loan you will choose depends on your credit score, savings for the down payment, and qualifications to certain types of loan programs, including FHA and VA loans.

6. Shop around for lenders

Compare different lenders before landing on the right mortgage to suit your terms and interest. Do not settle for the first lender you get; instead, get pre-approval quotes from at least three to five lenders. When you compare offers look not only at the interest rate, but also at the fees, terms, and closing costs associated with the loan.

Some financiers tend to specialize more on a type of loan, such as FHA/VA loans while others have better competitive interest rates with conventional loans. By reviewing several offers you are able to choose the best loan according to your budget needs and saves you money in the long run.

7. Apply and wait for pre-approval

From there, you should apply for your mortgage pre-approval through the lender you have selected. This will normally require an online or walk-in application form and submission of the financial documents listed above. The lender conducts credit checking during the application process.

Some time will elapse while the lender reviews your financials and issues a letter called a pre-approval letter. That letter will state how much you have been approved to borrow, the type of loan being offered, and sometimes an estimated interest rate. Typically, a pre-approval letter is valid for 60 to 90 days, so by the time you start house hunting, it's not too early. It's time to get serious about searching for your home.

8. Apply Your Pre-Approval to Strengthen Your Offer

Now, armed with your pre-approval letter, you can confidently look for a house, and the pre-approval letter will show that to the seller you are a serious buyer with financing already in place and that's already ahead of the game when participating in bidding wars or negotiating on price.

Remember that pre-approval is not a final approval. Your loan will be underwritten when you submit a bid on a property. To keep your pre-approval, you should avoid making big purchases, taking on new debt, and changing jobs before closing the deal on your home.

Conclusion

Getting pre-approved on a mortgage is a crucial step in the homebuying process: it's one thing to know what you can afford; it's another thing entirely to have the pre-approval that will strengthen your hand when negotiating with potential sellers. Use the following to make getting preapproved smooth sailing: Check up on your credit score, gather those documents necessary for this process, know and adjust your debt-to-income ratio, and shop around for lenders so one will know how to successfully negotiate a pre-approval. Once preapproved, you'll be ready to make informed decisions about moving closer toward buying your dream home.

Adjustsable Rate Mortgages: A Flexible Financing Option.

Sources:

Consumer Financial Protection Bureau. "Buying a House: Tools and Resources for Homebuyers." https://www.consumerfinance.gov

U.S. Department of Housing and Urban Development (HUD). "Homebuying Process: Step by Step." https://www.hud.gov

Investopedia. "How to Get Pre-Approved for a Mortgage." https://www.investopedia.com

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