Learn How to Get Preapproved for Your Mortgage

For many looking to own a home, getting preapproved for a mortgage is a key step. This involves a lender looking at your credit score, income, and finances. Pre Approval not only helps you set a budget before house hunting but also signals to sellers that you're serious about buying. The factors for pre approval, like your credit score and income, play a crucial role. It's like your starting point, giving you a clear path as you dive into the home-buying journey.

What is mortgage pre-approval?

Mortgage pre-approval is like a green light from a lender saying, "You can borrow this much to buy a home." It's usually a paper or letter that assures the lender is ready to proceed with the loan if the home meets certain criteria and your finances stay relatively stable.

This preapproval is determined by looking at your financial profile – your income, what's in your bank and investment accounts, and your debts. The lender will also check your credit score. With all this info, they can give you a good estimate of how much home you can afford. If everything checks out, they may even specify the exact amount they can lend you.

Prequalification vs. Preapproval: What's the Difference?

Prequalification:

When you prequalify for a mortgage, it's a bit like dipping your toes in the water. It's a quick look at what kind of financing you might get. However, it's a smoother process, usually involving a soft credit check without thorough verification of the information you provide.

Pre Approval:

On the other hand, pre-approval goes a step further. It involves more detailed checking, providing a better reflection of your ability to secure a mortgage. This becomes especially handy when you're ready to make an offer on a home, assuring sellers that you have the financial capacity to make the purchase.

Pre Approval vs. final approval: What's the Difference?

Like how prequalification and preapproval are different, pre approval differs from final approval too.

Pre Approval:

While pre approval is a positive step, it doesn't guarantee you the loan. It's a preliminary check where the lender takes a brief look at your financial situation.

Final Approval:

Final approval is the real deal. Here, the lender dives deep into your application, thoroughly examining your finances and the specifics of your home purchase. They verify employment details, schedule appraisals, and conduct an extensive review. If unexpected issues arise during this process, you might face challenges in securing the loan or witness changes in your loan terms.

Steps on Getting Preapproved for a Home Loan

To secure preapproval for a home loan, you can start by filling out an online application and having a chat with a lender, either over the phone or in person at a local bank branch if that's more your style. Regardless of your preference, here are the easy steps to follow:

1. Selecting a Mortgage Lender: Find the Best Rates and Fees

When aiming for the most favorable rates and fees, take the time to explore various mortgage lenders before settling on one for your pre approval.

Check out different options to identify lenders with the lowest rates and fees. Applying in more than one place allows you to compare mortgage offers, potentially securing you a better rate. Additionally, going through the preapproval process with multiple lenders offers insights into their handling of mortgage loans, the fees they charge, and an overall sense of their customer service. Brace yourself for undergoing the preapproval process a few times to make an informed decision.

2. Collect Your Personal and Financial Documents for Mortgage Pre Approval

• Recent Pay Stubs: covering at least the past 30 days.
• W-2s: for the last two years.
• Proof of Additional Income: like bonuses, commissions, child support, or rental revenue.
• Account Statements: spanning the last two months, encompassing checking, CDs, and retirement savings.
• Details of Current Loans: and any letters explaining recent loans.
• Gift Letters: if you receive money for your down payment.
• Legal Records: in case of recent divorce, bankruptcy, or foreclosure.
• Landlord Contact Information: for payment verification if required by the lender.
• Identification: such as a driver's license or passport, to confirm your identity and U.S. citizenship. Foreign nationals can also secure financing but may face additional complexities.

If you're self-employed, the process may involve extra steps, like an income audit. This could mean having an accountant verify your stable income by speaking with customers, reviewing business records (such as profit and loss statements), or taking other necessary measures.

Organize these documents before approaching any lender for pre approval to streamline the application process and enhance your chances of a successful outcome.

3. Review Your Credit Report for Mortgage Pre Approval

Alongside providing necessary documents, you'll also undergo a hard credit check by the lender. This step ensures your credit score meets the requirement for home purchase.

Before your lender conducts the credit check, it's wise to review your credit report yourself. Identifying and rectifying errors beforehand is crucial, impacting not only your pre approval but also the potential for securing the best mortgage rate.

Federal law allows you a free weekly copy of your credit report from each credit bureau, accessible at AnnualCreditReport.com.

For conventional mortgages, a minimum credit score of 620 is typically required. If you're eyeing an FHA loan, federally-insured, a score of 580 with a 3.5% down payment is necessary. Other loan types, like VA and USDA loans, have mandated minimum credit scores, but lenders often set their own thresholds. Generally, a higher credit score enhances your chances of securing a lower interest rate and favorable mortgage terms.

During the credit check, the lender examines your credit report and history, focusing on your credit utilization ratio. This ratio reflects outstanding balances on your credit cards relative to your total credit limits. A lower credit utilization ratio increases your likelihood of getting preapproved for a mortgage.

4. Secure Your Preapproval for a Mortgage

Getting preapproved is a flexible process, and many lenders allow applicants to complete it either in person or online.

Lenders often use the "28/36" qualifying ratio to evaluate your application and determine the monthly payment you can handle. Ideally, your mortgage payment should not exceed 28 percent of your gross monthly income, and the total of all your debt payments (including credit cards, car loans, and other obligations along with your mortgage) should stay within 36 percent of your gross monthly income.

Expect a hard credit inquiry during this process, which may temporarily lower your credit score. The impact lessens over time and disappears from your credit report after two years.

If you're comparing offers, aim to get pre-approved by multiple lenders within a 45-day period to minimize the impact on your credit score, as multiple hard pulls can be grouped into one on your credit history.

Once the lender evaluates your credit and financial profile, they'll decide whether you qualify for a mortgage pre-approval. If approved, you'll receive a preapproval letter indicating the loan amount, maximum home purchase price, pre approval expiration date, and details about the loan type and term.

How Quickly Can You Get Mortgage Pre Approval?

The time it takes to get pre approved depends on your chosen mortgage lender, your eligibility, and the required verifications. While some applicants may secure preapproval in as little as one business day, it typically takes a few days or up to a week. If additional processes like income audits are necessary, the timeline may extend further.

Ideal Timing for Mortgage Pre Approval

The optimal moment to seek mortgage pre approval is before you embark on your home search. If you find a home you adore without pre approval, starting the process then might be too late to make a timely offer.

Many sellers prefer a preapproval letter as part of your home offer, often before entering into a contract with you. As soon as you're committed to buying a home and have your finances ready, apply for preapproval from a reliable lender.

Managing Your Mortgage Pre Approval Timeline

Initiating the preapproval process early, maintaining organization, and staying updated on your application can expedite the pre approval timeline. The sooner you secure pre-approval, the quicker you can dive into serious house-hunting.

Duration of Pre Approval Validity

Most mortgage pre approvals are valid for 90 days, although some lenders may authorize a 30- or 60-day pre approval. If it expires, renewing it typically involves your lender rechecking your credit and finances. Keep in mind that this might result in another temporary drop in your credit score due to a hard pull.