Why it's important to get pre-approved
Getting pre-approved for a mortgage is important for several reasons:
- Accurate budgeting: Pre-approval helps you understand how much you can afford to borrow, enabling you to set a realistic budget for your home search.
- Competitive advantage: Sellers and real estate agents view pre-approved buyers as more serious and reliable, giving you an edge in a competitive housing market.
- Faster closing process: Pre-approval expedites the mortgage application process since much of the necessary paperwork and verification has already been completed.
- Rate protection: Pre-approval may lock in an interest rate for a specific period, safeguarding you against potential rate increases while you search for a home.
Six steps to get pre-approved for a mortgage
1. Collect important documents
"For those considering buying a home, getting pre-approved for a mortgage should be your first step. While securing a loan can seem daunting, the process of obtaining a mortgage doesn't have to be confusing or intimidating," Says Cache Nies from Intercap Lending."
When it comes to collecting important documents for mortgage pre-approval, it's essential to provide the lender with a comprehensive view of your financial situation. Here are some key documents you should gather.
- Proof of income
- Employment verification
- Proof of assets
- Credit history
- Identification
- Debt-to-income ratio (DTI)
- W-2 statements
- Pay stubs
- Bank statements
- Driver's license
- Social Security number
Cache also recommends, "For most loan programs, a lender will want to see that you have at least two years of work experience. Credit is important, so paying your bills on time, not closing accounts, or racking up large balances will ensure that you are positioned in the best way possible when it comes time for qualification."
Deposit all earnings into a bank account. Lenders will have to view bank statements when it comes time to purchase a home, and large deposits will need to be sourced. Submit your tax returns because, when qualifying for a home loan, lenders oftentimes will need to review the past two years of income and tax liabilities. To ensure that your ducks are in a row, make sure to file on time.
2. Get pre-approved before you start house hunting
Obtaining pre-approval before starting your house hunt is essential for a few key reasons. Firstly, it provides you with a clear understanding of your budget and helps you focus on properties within your price range. With pre-approval, you'll know exactly how much you can borrow, saving time and effort by avoiding homes that are outside your financial reach.
Secondly, pre-approval give you a competitive advantage. Sellers and real estate agents see pre-approved buyers as serious and reliable, giving you an advantage in competitive markets. It strengthens your position when making an offer on a property, as sellers have assurance that you are financially capable of securing a mortgage.
Lastly, pre-approval facilitates faster decision-making. The necessary paperwork and verification have already been completed during pre-approval, allowing you to move forward with the mortgage application more efficiently. This speed can help you secure a property before other potential buyers who have not yet obtained pre-approval.
3. Check your credit score
A good credit score is crucial for mortgage approval. "Get pre-approved early. Doing so gives you time to collect the documents you need and especially correct any errors on your credit report," recommends William Seeber from Chicago Financial Services. Start by obtaining a copy of your credit report from one or more of the major credit bureaus (Equifax, Experian, and TransUnion). If your score is lower than desired or you notice any issues on your report, take steps to improve your credit score score before applying for pre-approval.
Lenders rely on credit scores to assess your creditworthiness and determine the terms of your mortgage, including interest rates and loan options. A higher credit score generally indicates that you have a history of responsibly managing your debts, making you a more attractive borrower. A good credit score can increase your chances of mortgage approval and help you secure more favorable loan terms.
"Lenders are being cautious, so having a solid financial profile will increase your chances of securing a favorable mortgage rate. Keep in mind that interest rates are subject to change, so it's wise to monitor them closely," says Michael Corwin from KC Mortgage Duo. "While it's tempting to stretch your budget to afford a home in a competitive market, make sure you're comfortable with the monthly mortgage payments and factor in potential future interest rate increases."
4. Apply for pre-approval
The application step is a critical phase in obtaining pre-approval for a mortgage, as it involves formally submitting your request to a lender. After gathering all the necessary documentation, such as income statements, tax returns, bank statements, and employment history, you'll be ready to begin the application process. This typically requires completing a detailed application form provided by the lender, which will gather comprehensive information about your personal and financial circ*mstances. Accuracy and completeness are vital during this stage, as any errors or omissions could potentially delay the pre-approval process. In addition to providing the required documents, you'll need to authorize a credit check, allowing the lender to assess your creditworthiness based on factors like your credit score, payment history, and existing debts. It's crucial to ensure that all the information provided is current and accurately reflects your financial situation. Once your application is submitted, the lender will carefully review and evaluate the details provided to determine your eligibility for mortgage pre-approval.
5. Get your pre-approval letter
If you meet the lender's criteria, you will receive a pre-approval letter. This letter outlines the loan amount you're approved for, along with other relevant details such as the loan term, interest rate, and any conditions or contingencies that need to be met. The pre-approval letter serves as proof to sellers and real estate agents that you have undergone a preliminary evaluation by a lender and are a serious buyer.
It's important to note that a pre-approval letter is not a guarantee of a mortgage loan. It provides an initial assessment based on the information provided, but the final approval will depend on additional factors, including a satisfactory appraisal of the property you wish to purchase. It's advisable to maintain open communication with your lender throughout the process and provide any requested updates or additional documentation as needed.
6. Know how long your pre-approval lasts
Pre-approval letters are not indefinite; they come with an expiration date, if you were wondering how long pre-approvals take. The expiration period can vary, but is commonly between 60 and 90 days. This means that your pre-approval is valid for a specific timeframe, usually a few months from the date of issuance.
The expiration of a pre-approval is necessary because your financial circ*mstances can change over time. Lenders want to ensure that the information they used to determine your pre-approval is still accurate and reflective of your current financial situation. As such, they set an expiration date to encourage borrowers to complete their home search and proceed with a mortgage application in a timely manner.
If you find a property you wish to purchase after the expiration date, you may need to go through the pre-approval process again, which can involve providing updated financial information and documentation.
7. Contact more than one lender
Contacting multiple lenders when seeking a mortgage is important for several reasons. First, it allows you to compare interest rates, loan terms, and fees offered by different lenders, helping you secure the best possible mortgage deal. Second, by exploring multiple options, you gain insight into lender requirements and customer service, enabling you to choose a lender that aligns with your needs.
"It's important to understand the rules of the game you are playing. Therefore, we recommend seeking guidance from a home loan expert who can walk you through the pre-approval process. With proper direction, you can position your qualifications on paper to maximize your savings when it comes to interest rates and closing costs. It's not a matter of if you can qualify for the loan you want, it's a matter of how," recommends Richard Ray from Caliver Beach.
Additionally, contacting multiple lenders gives you negotiation power and helps you understand the range of loan amounts you qualify for through pre-approval offers. Overall, shopping around and comparing offers empowers you to make an informed decision and potentially save money on your mortgage.
8. Once you're pre-approved, don't rock the boat
When you have a pre-approval in hand, avoid making any big decisions like leaving your job to start a business, buying a new car, or co-signing a loan with a family member. This could change your picture of financial stability and affect your chances of successfully buying a home.
If you're considering a substantial move that could change your income or credit status, first consult with your lender to make sure you're not sabotaging your mortgage pre-approval.
Mortgage pre-approval FAQs
How long does it take to get pre-approved?
The pre-approval process can take a few days to a couple of weeks, depending on the lender and your financial circ*mstances.
What do you do after you are pre-approved?
After pre-approval, you can begin your home search with confidence. Work with a real estate agent to find properties within your budget and negotiate offers with sellers.
What do you do when you can't get pre-approved?
If you're unable to obtain pre-approval, consult with your lender to understand the reasons behind the decision. Improve your credit score, address any outstanding debts, or consider alternative financing options.
Do mortgage pre-approvals affect your credit score?
Mortgage pre-approvals usually have a minimal and temporary impact on your credit score. While the credit check involved in the pre-approval process is considered a hard inquiry, it typically results in only a slight decrease of a few points or less.
Do you have to use the same lender for pre-approval and your loan?
No, you don't need to use the same lender, unless you've signed a contract. If you get a quote from a new lender that offers more favorable rates and terms, you can certainly work with that lender for your final loan.
If market conditions have changed since your home pre-approval, you might be able to get a lower interest rate and better loan terms. It could be worth it to shop around one last time. Even a slightly better deal could save you money over the long term.
How is a pre-approval different from final loan approval?
Your mortgage pre-approval tells your real estate agent that if you find a house you want to buy, the loan you need will likely be approved—based on an initial look at your credit and finances today.
Later, after your offer on a home is accepted, your lender takes a deeper dive into your job history and finances to make sure nothing has changed and you'll be able to make payments on the home. They also examine the home to make sure it's a good investment. All of that is part of the final loan approval process before you get the keys to your new home.
What's the best way to get pre-approved for a mortgage?
Start by researching reputable lenders and comparing their offerings. Submit complete and accurate documentation, respond promptly to lender requests, and maintain a good credit profile.
What factors are considered for pre-approval?
Lenders evaluate factors such as credit history, income stability, employment status, debt-to-income ratio, and the amount of funds available for a down payment.
