What Do You Need to Get a Mortgage Pre-approval

When purchasing a house, you will likely not to have such a huge sum at hand to cover the total cost. You might consider taking a mortgage. However, the lenders usually only spare time for serious buyers who have already been pre-approved for a home loan and are ready to buy. That's why when looking for a home, you should first get pre-approved for a mortgage loan.

What is a mortgage preapproval?

To find out how much of a mortgage loan you will get for a house, you must get preapproved for a mortgage. Most lenders will look at your income, bank statements or bank accounts, pay stubs, and credit score or credit report to give you a figure for how much you can borrow, what your interest rate would be, and what kinds of mortgage loans you might be preapproved for.

A mortgage pre-approval shows that a borrower will likely get the money they need to buy a home. Pre-approvals are just permission to start house hunting. They do not mean the loan will be approved. Once a buyer has been pre-approved for a mortgage, they can look for a home with the assurance that their offer to purchase will be accepted.

Using your pre-approval, you can estimate the mortgage closing costs and speed up the final mortgage approval process: tax returns, the mortgage process, soft credit pull, lower credit scores, and the underwriting process.

Preapproval vs. prequalification

There are two ways to determine how much money you can borrow before applying: get pre-approved or prequalified. Some loan providers use both interchangeably despite subtle distinctions between the two procedures.

If you're not sure if you're financially prepared to buy a home, getting pre-qualified is an excellent first step. Getting pre-qualified for a mortgage typically involves an informal assessment of your financial standing. To determine if you qualify for a mortgage and how much you can borrow, you provide the loan officer with your financial history, including your credit score, debts, income, and assets. The mortgage pre-qualification tool can help you determine if you meet the requirements.

If everything checks out during mortgage prequalification, the following step is preapproval. You may expect a loan officer to check your credit report and look over financial documents to make sure you can afford the loan before giving you the green light for the mortgage. You can skip the pre-qualification stage and go right to the preapproval process if you are confident in your credit history and financial readiness to buy a property and are ready to start looking.

Why you should get a mortgage preapproval

By evaluating your income, assets, debt, and credit history, a lender can determine how much of a loan they will be willing to provide you to purchase a home. These are the criteria that the lender will use to assess your repayment capacity.

With a lender's support, real estate brokers and sellers will take you more seriously as a home buyer. Once a lender has reviewed your finances and determined how much house you can buy, they are said to have given you pre-approval.

Getting pre-approved can help you save time because once you know how much you are allowed to borrow, you can narrow your search for a home to those within your budget. Because of this, you may stop worrying about the purchase price and instead concentrate on the house's amenities.

If you go into negotiations with a pre-approval letter from a lender in hand, sellers and real estate agents will know that you are a serious buyer about purchasing the home. Since the lender has already collected and processed much of your financial data, getting pre-approved can speed up the closing process.

How to get preapproved for a mortgage

Shop for a mortgage lender

You should look into many possibilities to discover who offers the most affordable rates and fees. You should also consider submitting mortgage applications to more than one institution. Getting preapproved by numerous lenders will help you learn more about each one, including the mortgage rates they offer, the fees they assess, and how satisfied customers have been in the past. It's important to remember that you may have to go through the preapproval procedure more than once.

If you take the time to check rates and fees among various lenders, you may save thousands of dollars over the 30-year mortgage. A hard inquiry, which is made in order to determine your eligibility for a loan, might have a short-term negative effect on your credit score. Because you're applying for the same loan with multiple lenders, you'll only get dinged once, even if several of them give you preapproval. One of the most prominent American credit scoring companies, FICO, suggests a 30-day cap on such applications.

Prepare your documents

It is necessary to provide proof of your income, assets, and debts in order to get preapproved for a mortgage. The following are typical components of required documents:

• A copy of your most recent 30 days of pay stubs;
• Previous two years' worth of W-2 forms;
• Documentation of any additional sources of funding (such as bonuses or commissions, child support, or rental revenue);
• Financial records from the last two months, including bank, CD, and retirement account statements;
• Financial records for all outstanding loans;
• Explanation letters for any recent loans you've taken out;
• A letter of intent from the donor of the down payment gift;
• Documents from the court system if you've just gone through a legal process like a divorce, bankruptcy, or foreclosure;
• Your landlord's contact information in case the lender needs to confirm your identification or residency status in order to process a loan. This is to ensure that you are a legal U.S. resident and to protect you from loan fraud. Securing a loan as a foreign national is more involved, but not impossible.

Self-employed individuals may furthermore be subject to an audit of their income and additional paperwork requirements. You can do this by having an accountant check the reliability of your income through means such as client interviews, analyses of financial documents such as profit-and-loss accounts, and so on. If you are self-employed, your lender will let you know what is needed. If you want to get preapproved by a lender, you'll need to provide the following details, which you should compile before shopping for offers.

Check your credit

You'll need to provide proof, and you'll have to let the lender check your credit thoroughly. If you want to ensure you get the best possible mortgage rate, it's in your best interest to check your credit report before your lender does. A credit score of 620 and higher is required to obtain a typical mortgage loan. This, however, is analogous to declaring that a grade of D is acceptable. Your credit score needs to be quite good for you to qualify for the best loans. If your score falls between 740 and 799, it is regarded as very good, and if it is 800 or higher, it is deemed excellent by the credit reporting agencies. A credit score in these ranges may get you a far more favorable interest rate than one in the "excellent" range would.

Interest rates on mortgages are inversely proportional to credit scores. Preapproval may be possible even with a poor credit score if you apply for a federally backed or specialty loan program, such as an FHA loan. Once each year, you can get a free copy of your credit report from each of the three major credit reporting agencies as required by federal law. Your credit utilization ratio, or the total amount you owe in relation to your entire credit limit, will be one of the factors considered by the lender during the credit check. Your application's odds of being approved increase as your credit utilization ratio decreases.

Apply for preapproval

The preapproval process can be started either in person or online at most financial institutions. Many lenders use the "28/36" qualifying ratio to determine your monthly payment based on your income and the time you plan to keep the property. Lenders prefer that your monthly debt payments (including your mortgage) take up only 36% of your gross monthly income.

After reviewing your financial history and credit score, the lending institution will decide whether you are preapproved for a mortgage and, if so, how much you will be able to borrow. If so, you'll receive a preapproval letter detailing the terms of the loan.

Mortgage preapproval timeline

How long does it take to get mortgage pre-approval?

Knowing how long it takes to get mortgage pre approval may help you prepare. You might be able to get a preapproval for a mortgage in as little as one business day, depending on the mortgage lender you work with and whether you qualify, but in most cases, it takes a few days or even a week to receive it. If you have to go through an income audit or other verifications, it might take even longer than that.

How long does a preapproval last?

The time that a mortgage preapproval is valid can vary based on the lender that you work with. In most instances, it might last anywhere from sixty to ninety days. Because of the enormous potential for change in your financial circumstances within a short period, many lenders are unwilling to incur the risk of their arrangement with a prospective borrower falling through after the initial 90-day period has passed.

What to do after you are preapproved

Shopping begins once you obtain your mortgage pre-approval letter. You can start looking for homes online to see what fits your budget and needs. With a mortgage pre-approval letter, you know how much you can spend, how aggressive an offer to make, and how financially solid you are to buy a property.

After narrowing your choices, you can decide which properties to see. Contact a Better Houses and Gardens real estate agent to get an idea of homes available to you. The mortgage pre-approval letter might be used to negotiate when you find a home you like. Make sure the seller understands your house offer is backed by a preapproved loan. This will boost the offer's chances. Some sellers prefer a lesser bid from a pre-approval letter holder than a higher bid from a non-holder.

What if you cannot get preapproved

If you weren't pre-approved, ask your lender why. Most lenders will explain why you were rejected and offer to advise. You may not have qualified due to a low credit score, low income, or inconsistent employment history. You may qualify for financing if you follow your lender's advice and improve. However, if you're denied a mortgage owing to a low credit score, improve it and apply again. Over the next 6–12 months, paying off a credit card and paying your bills on time will boost your credit score.

The lender will request bank statements when you apply for a home loan. They do it for your down payment and closing charges. The lender may also want a 2- to 3-month cash cushion after mortgage payments. The lender may advise you to wait to buy a home if you don't have enough money after closing charges and the down payment. If you don't make enough for a mortgage, there are various mortgage options.

Discuss a lower loan amount with your lender. You can consider a shared mortgage if you're married. The lender evaluates your and your spouse's joint income to determine affordability, which may help you qualify.

Paying down credit cards and other loans might enhance your spending power and help you qualify for pre-approval. When qualifying for a mortgage, employment gaps and inconsistency can hurt. Mortgage lenders usually require 24 months of consecutive income before pre-approving a borrower. If you're newly employed or unemployed, the lender may reject your application. Before reapplying for a home loan, you may need to wait two years.

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