When you start the process of buying a home, the single most important thing you can do is to get a mortgage pre-approval. This step is relatively easy and straightforward, and will give you a clearer picture of your exact budget. But more than that, sellers often look at pre-approval as an indication of how serious the buyer actually is.
In order to get pre-approved for a mortgage, you need to provide your lender with extensive documentation proving your income, assets and debt obligations (we will get into those details later). If you qualify, you will receive a pre-approval letter indicating how much you can borrow to purchase your new home.
Below, we will cover how to get pre-approved for a home loan and why it can be incredibly important.
What Is A Mortgage Pre-Approval?
When a lender preapproves you for a mortgage, it tells you exactly how much they are willing to loan you to pay for a home. The lender makes this determination by reviewing your credit report, income, employment history, assets and debts. Your pre-approval will come in the form of a letter. It will also contain an initial interest rate as well as terms of the loan.
Keep in mind that a pre-approval is not a commitment to lend. Your desired house still has to pass an appraisal to qualify for whichever mortgage option you are requesting. While a mortgage pre-approval is not an ironclad guarantee that your loan will end up closing, having a pre-approval does show sellers that you are serious in your intent to purchase a home and have the financial resources to follow through
Mortgage pre-approval significantly boosts your chances in the housing market. For starters, most real estate agents expect you to be pre-approved for a mortgage before you even request their services. They tend to view it as an affirmation that you are someone they can trust and that you are serious about buying a home. Pre-Approval basically hedges against window shoppers since a lot of time and effort goes into finding and showing properties.
The entire process takes about two-to-four weeks.
What Is A Mortgage Pre-Approval Letter?
If a lender offers you a pre-approval, they will issue you a pre-approval letter. A good pre-approval letter will contain several pieces of information:
- The amount of the pre-approval
- The length of time the letter is valid for
- Which loan option is being used (for example, 30-year conventional)
Is Pre-Qualified the Same as Pre-Approved?
No, a mortgage pre-qualification is not the same as a pre-approval. Pre-approval is a process that includes getting an in-depth review of your finances or a hard credit check. Pre-qualified does not. Pre-qualification offers a relatively informal estimate of how much you can borrow. In a pre-qualification, a lender usually asks for verbal or written estimates of your income and assets to calculate your debt-to-income ratio (DTI) and down payment savings.
When it comes to choosing between getting pre-qualified versus pre-approved, a pre-approval is going to be more comprehensive and give you a more accurate look at the types of mortgages you qualify for.
While pre-qualifications are a good way to come up with a budget and an initial estimate of how much you can afford, in the eyes of sellers and the real estate agents, they do not mean very much because none of the numbers are verified. This can be particularly problematic in markets experiencing low inventory.
How Long Does Pre-Approval Last?
If you are pre-approved, you will receive an approval letter offer that lasts for 60 – 90 days, depending on the lender. After that, you will need to apply again with another credit check and updated paperwork. If there are any major changes to your financial situation, your pre-approval amount might also change.
You can look at a house without pre-approval but getting pre-approved early in the home buying process is most beneficial. This way, you can find out if there are any issues that could prevent you from getting financing.
How to Get Pre-Approved For a Mortgage
In addition to considering your credit score, lenders will want to verify your employment and income. They will also be considering your debt-to-income ratio (DTI), which is a calculation of your total monthly debts, divided by your monthly income. This ratio, expressed as a percentage, helps lenders make sure you have enough income to reasonably cover your debts.
The exact DTI needed for mortgage approval varies by loan type. But generally speaking, you’ll want your debt-to-income ratio to be 50% or lower.
Now that you understand the importance of the mortgage pre-approval, let’s run through the process.
Step 1. Get Financially Ready
If you are looking to buy a home in the near future, your first step should be to make sure you are financially prepared. There are a couple of steps you can take to get ready.
Check Your Credit Score
A good credit score is key to getting pre-approved. Each lender and loan type has a minimum credit score requirement that will apply to both you and any co-applicant. For conventional loans, lenders typically like to see a credit score of 620 or higher. Before applying for a pre-approval, take some time to request a free credit report to ensure there are no errors on your report that could be negatively affecting your score.
Since completing a pre-approval application does affect your credit score, getting a free credit check that will not impact your credit score will give you a rough idea of your current score. You can then use the estimate as a baseline for checking if you meet a lender’s mortgage qualifications.
Pay Down Your Debt
During the mortgage pre-approval process, your lender will also look at your debt-to-income ratio (DTI), which compares your monthly debt obligations to your monthly income. DTI requirements can vary by lender and loan type, but generally speaking, the lower your monthly debt compared to your income, the better. For the best chance of qualification, you want to keep your DTI at 43% or less.
Step 2. Gather Your Documents
Your lender will run a thorough search of your financials. To avoid any future headaches and expedite the process, have the following documents at hand. Keep in mind that this is not an exhaustive list:
- Proof of Identity: You will need to show your driver’s license or government-issued ID, passport, Social Security card and other documents that verify who you are and where your permanent residence is.
- Proof of Employment History: Most mortgage lenders require the last 30 days of pay stubs that also indicate your year-to-date income.
- Tax Documentation: Be sure to bring your last three federal and state tax returns along with your last three W-2 forms. If you are self-employed, you can collect your most recent 1099 forms.
- Bank Statements: Likewise, you will need the last three month’s worth of financial statements for all your accounts. This may include checking, savings, money market, and certificate of deposit (CD) accounts.
- Asset Information: You should also collect statements for brokerage accounts or other taxable investment vehicles. Proving you have assets at hand would serve you well in the mortgage pre-approval process.
- Real Estate Income: If you are earning income from any property, you will need to provide specific paperwork. These documents can include a lease and documentation of rental income for the last three years. You will also need to prove the current market value of the rental property.
Step 3. Shop Around
When you are going through the process of applying for a mortgage loan, shopping around could result in a better rate and higher loan amount. It is not just rates you should be worried about, but also how the lender will treat you, so you need to be comfortable. Do they charge fees for mail-in or phone payments? Will they service your loan after it closes, or will the servicing be sold? Will they proactively reach back out to you if there is an opportunity to get you into a lower rate? All of these things need to be considered.
What to Do After You Get Pre-Approved for a Mortgage?
After a lender pre-approves you for a mortgage, your journey through home buying continues. Pre-Approval usually comes in the form of a letter proving that a lender has verified your information and is willing to give you a specific loan. But remember, you earned pre-approval because you demonstrated your trustworthiness as a responsible borrower. If you fail to in your obligations, your lender may reduce the amount you can borrow, raise your interest rate or revoke the pre-approval if you fail to maintain a good financial standing. Lenders continue to monitor your debt-to-income ratio. So you should avoid making any large purchases without first notifying your lender.
In addition, avoid opening any new lines of credit. Each credit inquiry will knock down your credit score and change your credit capacity. Instead, focus on paying off your current debt and keep paying bills on time to boost your credit score. A different lender may take notice of your improved credit score and offer you a better interest rate.
Once you have found a home you are ready and able to commit to, your lender will move your mortgage pre-approval onto the final application phase. The loan finalizes when an appraisal of the home is completed, and your mortgage is tied to a particular property.
Find the Right Agent
Buying your house should be a fun and fulfilling experience. If you have done your research and evaluated what you can afford and what you truly need, finding a new home can be exciting. Learning more about the purchase process eliminates the fear of the unknown and lets you search for a home with peace of mind.
Windermere’s community of real estate professionals is our greatest asset. We have experts in all areas of real estate, from your typical starter home to condos, luxury properties, and new construction. While residential real estate is the mainstay of our business, Windermere also has offices and associates who specialize in property management, commercial real estate, and relocation services. To further facilitate the home buying process, Windermere has affiliated partners in certain regions to provide mortgage, title, and escrow services.
Call us today with any questions or concerns. Our professional Real Estate Agents will help you through this exciting process. (951) 369-8002