Want to learn how to get pre-approved for a mortgage? Check out our detailed guide and find the answers to your questions on mortgage loan pre-approvals.
You can follow several strategies to boost your preapproval loan amount. These encompass increasing your down payment, extending your loan term, securing a co-signer, and potentially seeking preapproval from multiple lenders. Initiating the home buying process from a position of financial stability is also advisable.
Understanding how to get pre-approved for a home mortgage is essential for anyone considering purchasing a home.
A pre-approval can be very helpful in figuring out your budget and demonstrates to sellers that you are a serious buyer, both of which are important in a very competitive real estate market.
Knowing how the mortgage pre-approval process operates and preparing ahead of time can assist when the time comes.
In this article, I will discuss everything you need to know to get pre-approved for a mortgage and realize your dreams of becoming a homeowner.
What Is a Mortgage Pre-Approval?
The period of time between the first pre-qualification and mortgage application is known as mortgage pre-approval.
Mortgage preapproval involves providing a lender with the same information and documentation you would submit for a mortgage application, such as proof of income and evidence of financial assets (savings accounts, real estate, and investments).
The mortgage preapproval also requires a credit check and may involve paying a fee. In return, the lender issues a mortgage preapproval letter, which specifies the amount they are willing to lend you for a home purchase. The letter also includes details such as the anticipated interest rate, the validity period of the preapproval, and other key terms.
Including a preapproval letter with your offer on a house can make your bid more attractive compared to others who need loan approval before closing. In competitive housing markets, offers without preapproval may not even be considered.
The mortgage preapproval indicates, given your circumstances, the maximum amount a lender can offer you and the kinds of loans you are eligible for.
While pre-qualification usually does not significantly affect your credit score, being pre-approved necessitates a rigorous credit check.
For real estate buyers, getting pre-approved is crucial since it increases the value of your offer.
Sellers are more inclined to sell to a buyer who has received loan pre-approval than to one who does not.
On the other hand, the lender will check your creditworthiness when you are pre-approved. In addition to filling out a mortgage application, you’ll need to submit supporting paperwork, including tax returns, bank statements, and pay stubs from recent employment.
If the mortgage lender carries out a hard credit check, your credit score may temporarily decrease. The sort of pre-approval you’re searching for, and the lender will determine how long it takes.
How Can Lenders Help in the Home Purchase Process?
For most consumers, the completion of a house purchase depends on mortgage lenders. They assist prospective purchasers by sending a pre-approval letter and eventually granting a loan.
If you contact a lender early in your search, you have a better chance of closing on the property of your dreams.
Lenders made your pre-approval mortgage experience less stressful and smooth compared to what may seem like the most daunting element of the process.
7 Steps to Get a Mortgage Pre-Approval
Here’s how you can get pre-approved for a mortgage:
Estimating a Specific Amount
Although you can borrow less, a lender may pre-approve you for a set amount. One method is using the amount you now spend on housing as a starting point for your monthly mortgage budget.
To know how much you can contribute to a house loan, deduct your non-housing costs from your take-home earnings or use a loan calculator.
Establish How Much You Can Afford to Pay Off
The minimum down payment required can range from zero to 20 percent of the property’s purchase price. Closing costs must also be paid, so having cash on hand is a smart idea. This can also help you meet the requirements to qualify for the best conventional mortgages.
Calculate the Ratio of Your Debt to Income
Your debt-to-income ratio, or DTI, is the percentage of your gross monthly income used to pay off debt, such as credit card debt or educational loans.
By entering your existing debt and potential mortgage amount, you may determine your debt-to-income ratio (DTI) using an online calculator.
Although it occasionally can be higher, lenders like applicants with a DTI of 36% or less, including the potential mortgage payment.
You could refinance, use an income-based repayment plan, or pay off your debt more quickly before taking out a mortgage if your monthly payments are unaffordable.
Credit Score
Knowing where you stand before contacting a lender might be beneficial.
To be eligible for a mortgage, you typically need a credit score of at least 620. A higher score will entitle you to better rates.
Before starting the home-buying process, aim to raise your score as much as possible. However, if necessary, you may also concentrate on lenders who specialize in working with low-score customers.
Your credit score and history significantly determine your interest rate and whether you are pre-approved. Get copies of your credit reports and point out any inaccuracies.
Before applying, try to settle any outstanding debts with creditors if you discover any. You may reduce your debt and pay your bills on schedule each month to improve your credit score.
Compile Your Documents and Data
Lenders will determine if you should be pre-approved for a mortgage based on your credit history, income, assets, and obligations.
Your documents will contain your current address, Social Security Number, and, if you have one, the job information for your co-borrower.
Along with evidence of income, you’ll need information from your bank and investment accounts.
To obtain a mortgage pre-approval letter, the lender may also need your pay stubs, W-2 tax form, and 1099s if you have any extra sources of income.
Although there are certain exceptions, lenders prefer two years of steady work.
Self-employed applicants may need to submit two years of income tax returns. Should your down payment originate from a gift or asset sale, documentation will be necessary to support it.
Additional paperwork will be required if you work for yourself or have other unique conditions.
Examples of these documents include:
- The previous two tax years’ business tax returns.
- Statements from business banks over the last two months.
- Profit and loss statement for the current year.
Speak with Several Mortgage Lenders
By comparing offers from different lenders, you can compare rates and fees and save thousands of dollars over the course of a 30-year mortgage.
However, pre-approval may cause a small drop in your credit score because it necessitates a hard-pull credit investigation.
It’s entirely feasible to obtain multiple pre-approvals concurrently, and in fact, it’s often a prudent strategy. Technically, there’s no restriction on the quantity of mortgage pre-approvals you can obtain, making it advisable to explore options with various lenders and banks.
Request a Mortgage Loan Pre-Approval Letter
When you start looking for a place, your priority should be a pre-approval letter from a lender. The letter demonstrates to the seller and the real estate agent assisting them that you are a serious buyer and that you are aware of your financial situation.
Pre-approval times range from one hour to ten business days, depending on the volume of documents your lender demands and the pace at which it processes applications.
After receiving your pre-approval letter, you can include it in your offers to show house sellers that you’re a serious buyer.
How Long Ahead of Time Should You Seek a Mortgage Pre-Approval?
A lender offering you a pre-approval mortgage will lend you a particular amount under predetermined conditions. The promotion ends after a predetermined period, like 30 or 90 days.
You should apply when you’re ready to start seriously looking at houses and making an offer. However, it’s also vital to read the fine print and know how long your pre-approval letter is valid.
A pre-approval does not guarantee a loan; the mortgage might still be turned down. Before a loan closes, a home assessment must be completed to ensure you aren’t paying more than the property is worth.
Additionally, if your financial circumstances change between pre-approval and closing, the lender’s offer may not stand.
Does a Mortgage Pre-Approval Guarantee Loan?
Only a loan commitment letter indicates final mortgage acceptance, notwithstanding all the guarantees a mortgage pre-approval letter offers. When a buyer makes an offer on a home, the seller must complete at least one full mortgage loan application.
The estimate documentation that the buyer gets from the lender may have different conditions, including fees and other expenditures.
Even at this late stage of the home-buying process, shopping around and comparing offers still makes sense. After that, the buyer will decide on their chosen lender and schedule a time for a property evaluation.
The loan commitment letter might be issued by the lender when the underwriting procedure is complete.
Final Thoughts on Getting Pre Approved for the Best Mortgage
Obtaining a mortgage pre-approval should be one of your first moves if you’re serious about purchasing a property.
Lenders will want to see several papers to confirm your income, obligations, and assets, such as pay stubs, tax returns, and bank statements. Based on those details, the lender will estimate the amount you can borrow and record it in a pre-approval letter if you qualify.
That letter can help you give offers to buyers and secure a home for yourself.
Frequently Asked Question for Mortgage Pre-Approvals
How long does it take to get pre-approved for a mortgage?
Getting pre-approved for a mortgage might take a few days or more. Each lender has a different schedule, depending on how soon you can give the lender the required data, such as evidence of your assets and income.
How can one obtain a mortgage pre-approval the best way?
Examine your credit score and report before contacting a lender to get a mortgage pre-approval. You can get a better mortgage rate if your credit score is higher.
If it’s low, try to bring it up before you begin the pre-approval process and start looking for homes.
Do pre-approvals for mortgages affect your credit score?
Obtaining a complete pre-approval requires a hard credit pull that may result in a few points being deducted from your score. Your credit reports might contain the hard inquiry for up to two years.
Receiving several pre-approvals or submitting multiple mortgage applications might lessen the impact on credit-scoring organizations because they are aware that customers browse around for rate quotations.
Within 45 days, several credit inquiries from mortgage lenders will appear on your credit record as a single query.
What determines your pre-approval loan amount?
What Factors Determine Your Mortgage Preapproval Amount? Brokers and lenders assess your preapproval amount based on the risk associated with lending you money. Essentially, you may secure a higher preapproval amount if your financial track record demonstrates a greater probability of consistently making on-time payments.
Can I buy a home worth more than the amount on my pre approval letter?
Typically, the mortgage preapproval indicates the maximum purchase price or loan amount for which the lender is willing to approve you and includes an expiration date. If you attempt to make an offer exceeding your pre-approval amount, sellers are likely to disregard it since you won’t be approved for the home loan.
We suggest customizing the preapproval letter to align with your offer, particularly if your offer is lower than your qualification amount. If the seller perceives you as qualified for a higher amount, they may attempt to negotiate for more.
