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How To Get A Mortgage Preapproval

Mortgage preapproval is the first step in the process of buying a home. When a lender preapproves you for a mortgage, it is suggesting that it would like to work with you. In a preapproval, the lender will tell you the types of mortgage you might be qualified to take out, what your rate could be, and how much you might be approved to borrow.

While searching for a home, getting a pre-approval for a mortgage is a very important step. You can consult with a lender and get a pre-approval letter to enable you to discuss loan options and budgeting with the lender. This step can resolve your house-hunting budget and the monthly mortgage payment that you can afford.

Furthermore, to get pre-approved for a mortgage, the lender will ask for your financial documents, such as tax forms and bank statements. The lenders also usually do a hard credit check to determine your credit score. This credit check will show up on your credit report, and it can also affect your credit score temporarily. You can also apply for a mortgage preapproval with several lenders to get the best deal.

What is Mortgage Preapproval?

A mortgage preapproval is a written letter from a mortgage lender stating that you are eligible for the mortgage amount that you have applied for. This is based on a review of your assets, credit history, income, and credit score. The “pre” in the preapproval is for preliminary. This means that the lender still has to validate all the details to issue a final approval before closing.

A preapproval offers an initial green light for a home loan that is based on a review of your finances, but it isn’t a guarantee that you will receive final approval. Getting pre-approved for a mortgage is an important step in the home purchase process. The sellers mostly want a preapproval letter before you accept your offer on their home. Thankfully, the process of applying for preapproval is fast and simple.

Requirement for Mortgage Preapproval

Mortgage pre-approval requires a buyer to finish a mortgage application. Then, offer proof of assets, good credit, confirmation of income, employment verification, and other documentation. The pre-approval is based on the buyer’s debt-to-income ratio, FICO credit score, and other factors based on the type of loan. Here are the requirements to get pre-approved for a mortgage:

Proof of Assets:

A borrower’s bank and investment account statements prove that they have money for the required cash reserves, closing costs, and down payments. The down payments, expressed as a percentage of the selling price, also vary by the type of loan. Several loans require the buyer to buy private mortgage insurance if they are paying 205 of the purchase price.

Proof of Income:

Homebuyers must offer W-2 wage statements and tax returns from the last two years, current pay stubs that show income, year-to-date income, and proof of extra income sources such as bonuses and alimony.

Employment Verification:

The lenders also verify employment by calling the employer to confirm the borrower’s salary and employment. Self-employed buyers will need to offer additional information such as the location and nature of the business, the stability of the borrower’s income, the ability of the business to continue generating income, and the financial strength of the business.

Good Credit:

To be preapproved for a mortgage loan, most lenders require a FICO score of 620 or 580 for a Federal Housing Administration loan. The lenders reserve the lowest interest rate for people with a credit score of 760.

Documents For Mortgage Preapproval

There are important documents that you need to provide to be preapproved for a mortgage, and they include:

Bank statements from the past 2 to 3 months, and this includes savings, checking, and money market accounts.
Down payment gift letter.
Driver’s license, social security card, or other form of identification.
Loan statement from the past 60 days. This includes credit cards, auto loans, student loans, and personal loans.
Rental history, contact information for the landlords, and proof of rent payments, which includes paid receipts or canceled checks,.
Information on other real estate if you have other properties.
Business records if you are self-employed.
Employment information, such as the contact information of the employers in the past two years,.
Tax returns.
Other source of income.
Pay stubs from the past 30 days.
Recent residence and tenure at each.

These are the documents required to be able to be preapproved by the lender for a mortgage loan.

How To Get Preapproved for a Mortgage

Applying for preapproval for a mortgage is a very simple process that requires only a few pieces of paperwork. It typically takes a few days for the lender to verify your financial and personal information. Here are the steps to getting preapproved for a mortgage:

Check your Credit Score

Before you start applying for a mortgage loan with lenders, you want to know what your credit situation is and how you can get pre-approval. To be eligible for a mortgage, you need to have a credit score of 620. To also be eligible for a FHA mortgage, you need to have a credit score of 580.

There are free services that you can use to check your credit score. In addition, your credit card issuer might also give you a free score on your monthly statements. You can also request a copy of your credit report from every one of the three major credit bureaus. Make sure that the information is accurate.

Calculate Your Debt-to-Income Ratio

Another main factor in getting preapproved for a mortgage is your debt-to-income ratio. To know your DTI, you will take all your minimum monthly debt payments and then divide the number by your gross monthly income.

Usually, the highest DTI you can have and still be eligible for a mortgage is 50%. However, depending on your lender, the type of loan that you will get, and your financial situation, you might be required to have a lower ratio.

Know How Much You Have for a Down Payment

As a part of your loan application, the lender will want to know how much money you saved for the down payment. If you are getting money from a family member to help with your down payment, then you will need to have them write a letter explaining that the money is a gift. Conventional mortgage borrowers can put down a 3% down payment, while FHA borrowers will need to put down 3.5%. For some mortgages, which include VA mortgages, the USDA enables no down payment.

Research Mortgage Lenders and Loan Types

There are several mortgage lenders to choose from, and they each have different benefits and features. Some lenders are ideal for first-time homebuyers because they provide things such as down payment assistance or even the ability to work with borrowers who don’t even have a credit score. Some others are focused on tech, and they provide a convenient and complete online application process. To choose the right lender, you have to consider your needs. Consider the features that are very important to you, and then search for lenders that provide those things.

As soon as you have applied for preapproval, your lender can help you locate the type of mortgage that is best for you. However, it is a good idea to learn the basics of the common types of mortgage loans and know which one might be a good fit for you. This way, you can make sure that the lenders you apply to provide the type of mortgages that you want. Several borrowers get conventional mortgages; however, government-backed mortgages can be an ideal option for people with lower credit or borrowers who want to avoid a down payment.

Gather your Documentation

When you apply for a mortgage, your lender will verify your finances to make sure that you can afford the loan. This means that you will need to offer documentation that shows your income and assets.

Your lender will tell you exactly the documents that you need; however, having everything ready ahead of time makes the process more smooth. Your lender will also do a hard credit check, and it might require extra home loan documents based on your situation, such as tax returns, pay stubs, or even bank statements.

Get Quotes From Different Mortgage Lenders

You might want to get quotes from different lenders to get the best deal on your home loan. Each lender has a different guideline and interest rate options, which can have a huge effect on your monthly payments. If you get preapproved by one lender, you are left with what it has to offer. When you get preapproved by several lenders, you can choose the best offer for you.

Several lenders provide the ability to apply for preapproval, including Better Mortgage, Bank of America, and Rocker Mortgage. It is very important to do research before deciding on the lender that you want. You should also research every lender and even the loan officer who will handle your mortgage loan. There is a huge difference in experience and knowledge depending on who processes your application.

After choosing some lenders, you will need to provide some information to finish the preapproval application process. An underwriter might examine your preapproval application to know how much you can borrow. If an underwriter has not reviewed your application, then you haven’t fully been preapproved, so make sure that you ask about the status of your loan application during the process.

As soon as the lender has all the documents it needs, it usually takes just a few days for the lender to let you know if you are pre-approved and how much you have been approved for. However, the preapproval process can take longer if you have a past foreclosure, IRS lien, bankruptcy, or poor credit.

If you are shopping around for a mortgage, you have a window of time where several credit inquiries by lenders are taken as a single inquiry for your credit scores. The window is usually 14 days; however, it could be longer.

Don’t get Approved too far in Advance

When you get your preapproval letter, it will say that it is good for 30 to 90 days. Since that is a relatively short period, you will want to wait to get preapproval letters until you are ready to start shopping for a home. The pre-approval is only a conditional approval.

Choose a Lender

As soon as you make an offer on a house, it is time to get official loan estimates from your list of potential lenders. After applying for a mortgage, the lender must offer this estimate within three business days of receiving your application. The document will include estimates for your monthly payments, interest rates, taxes and insurance, closing costs, and also details on how the loan works.

The steps listed above show how to get pre-approved for a mortgage loan.

Preapproval vs. Prequalification

Preapproval and prequalification are very different. A mortgage pre-qualification can be very helpful as an estimate of how much you can afford to spend on a home; however, a pre-approval mostly valid for 60 to 90 days is more valuable.

It also means that the lender has checked the buyer’s credit, confirmed employment, and verified assets to approve a specific loan amount. The buyers will benefit from consulting with a lender, getting a pre-approval letter, and then discussing the loan options and budgeting. The lender will offer the maximum loan amount, which can help you set the price range for the home buyer.

Do I have to be preapproved to get a mortgage?

A mortgage preapproval might sound like a huge step in the home buying process, placed between prequalification and approval. You don’t have to apply for preapproval; however, it is a good idea.

Firstly, applying to several lenders helps you compare and contrast what each has to offer. Comparing qualification terms is not quite as accurate. Secondly, having a preapproval letter shows the real estate agents. Also, the sellers that a lender said that you are likely to afford the amount that you are offering. Without a letter, you are likely to have a harder time getting an offer.

Tips for Getting Mortgage Preapproval

If you are not sure that you will be able to qualify for a mortgage, then here are some tips to increase your chances of getting preapproved:

Lower your DTI: paying down a credit card or paying off a loan with a high balance can reduce your DTI, and it gives you more space for a monthly mortgage payment.
Seek out down payment assistance: if you don’t have enough money for a down payment, you can search for nonprofits or lenders that assist.
Improve your credit: making timely debt payments and reducing your credit utilization can help increase your score.
Apply with several lenders; just because one lender denies you doesn’t mean that every lender will. Several lenders focus on working with borrowers with bad credit histories. In addition, getting offers from several lenders will help you make sure that you get the best deal.
Know why you were denied: if your application is rejected, the lender needs to tell you why. This can help you know what you can work on to boost your chance of getting approved in the future.

With the tips listed above, you can increase your chances of getting preapproved for a mortgage.

How Long Does Mortgage Preapproval Take?

This depends on the amount of information that the lender requires. Most lenders showcase a preapproval in minutes that checks your finances, while others provide fully underwritten preapprovals that require lots of documentation. This means preapproval could take between a few minutes and a few days, depending on your lender’s process.