Mortgage pre approval is an important step in the home buying process. It shows real estate agents and sellers that you are a serious buyer and are financially capable of purchasing a home.
It also gives you a clear picture of what lenders will offer you and how much your monthly mortgage payment would be. The preapproval process can be done online or with a personal loan officer.
What is Mortgage Pre-Approval?
Mortgage pre-approval is the process of determining how much money a lender is willing to lend you for a home. It is similar to a formal mortgage application, but it is more in-depth and requires additional verifications of your financial information.
Lenders review your personal information, credit history, credit score, income, assets, debts and tax returns to determine how likely you are to qualify for a loan. They also pull a credit report from one or more of the three major credit bureaus (Experian, Equifax and TransUnion).
Then, youll be given a loan estimate that shows the amount of money the lender is willing to approve you for. This will give you an idea of how much house you can afford and how much your monthly payments may be.
Many buyers are pre-approved for more than they actually want to spend, so its important to be transparent with sellers and their agents about your budget. This transparency allows you to make a more confident offer on a home and helps you avoid falling in love with a house thats out of your reach.
In addition, pre-approvals can help you stand out from other buyers in a competitive market. Sellers are more likely to accept your offer if they see that you have been pre-approved for a specific amount of money.
You should get pre-approved as soon as possible, preferably within 90 days of starting your search. This gives you time to shop lenders and find the best rate for your loan.
How Does it Work?
Getting mortgage pre approval is an important step before you start house hunting. It gives you the bargaining power to make a reasonable offer on a home and shows real estate agents and sellers that you are a serious buyer.
The preapproval process involves a lender verifying your financial information and credit score to determine your loan type, price range and mortgage options. Your lender will also evaluate your employment and income to verify that youre likely to make the monthly payments on your mortgage.
Your debt-to-income ratio (DTI), which is a calculation of your total monthly debts divided by your monthly income, will also be verified. Generally speaking, lenders want you to have a DTI thats less than 50%.
A good credit score will help you get the best rate and terms on your mortgage. However, if you have a low credit score or a poor credit history, you may be required to pay more for your mortgage.
Youll need to provide your Social Security number and documentation that verifies your identity. This could include your drivers license, passport or other forms of identification.
Once youve completed the preapproval process, your lender will transfer your file to a loan underwriter who will examine your finances and make a decision on full approval or conditional approval. Conditions might include a requirement for additional documents or to reduce existing debt.
The process is usually completed within 60 90 days. The loan preapproval letter you receive will state your maximum loan amount, the interest rate and loan term.
Keep in mind that your mortgage eligibility and budget will change if you make any significant changes between your preapproval and your loan closing. For example, if you change jobs, your income might drop enough to make you ineligible for a mortgage or your housing payment could increase so much that you would be ineligible for an FHA or VA loan.
What Documents Do I Need to Bring to the Lender?
Pre-approvals are an important step before you begin house hunting. They show sellers that you have the financial resources to afford a home. They also give you a head start on the mortgage application process and can help you get a better price on a home.
You can get pre-approved by completing a loan application online or over the phone. Then, your lender will do a credit check and verify your information. Generally, you can expect the process to take between one and two days.
There are a few standard documents that most lenders will want to see, including bank statements and income documentation such as pay stubs and tax returns. These will give them a clear picture of your income and allow them to evaluate your debt-to-income ratio.
The next standard document that most lenders will need is a list of all your expenses. This includes your rent, credit cards, car payments and student loans, which will allow them to assess your ability to handle monthly obligations.
If you are self-employed, you may be asked to submit a profit-and-loss statement or balance sheet. This is necessary to verify your businesss profitability and make sure you have enough funds to cover your expenses.
Lastly, the lender may ask you to provide letters of explanation for past late payments, collections, judgments or other negative items on your credit report. These are required because they can impact your debt-to-income ratio, which is a key factor in mortgage approval.
Getting pre-approved is a fast and painless process if you prepare ahead of time. But it is a conditional approval, meaning that you must maintain your income and debt levels during the loan approval process or risk having your approval rescinded.
How Long Will the Process Take?
If youre ready to get preapproved for a home loan, it can take from a few days to a few weeks depending on how quickly your lender can gather the documents and verify your financial information. However, you should always wait to make your final decision about a mortgage lender until you receive an official Loan Estimate.
Preapproval is an important step in the home buying process because it demonstrates your seriousness about purchasing a home. It also shows sellers that youre a credible buyer who can secure a mortgage, which can increase the chances that theyll accept your offer.
Lenders consider your credit score, income and debt when deciding whether to issue a preapproval. They may also perform a hard credit inquiry to verify your information.
The lender will use this information to determine how much you can borrow and how much of a monthly payment you can afford. Generally, lenders want to see that your mortgage payment takes up no more than 28 percent of your gross monthly income and that your total debt payments, including your mortgage, car loan, student loans and other debts, take up no more than 36 percent of your gross monthly income.
Once youre preapproved, youll receive a letter that states the loan amount and the terms for which you were approved. This letter will include the interest rate, estimated closing costs and other details youll need when shopping for a home.
Getting preapproved for a mortgage can also help you decide on a home price range and determine how much money youll need for a down payment. It can also give you time to build up your credit, which will help you qualify for a lower mortgage rate and can save you hundreds of dollars in interest over the life of your loan.
What Happens if I Dont Get Pre-Approved?
Getting pre-approved is a crucial step in the home-buying process. It shows the seller that you are serious about purchasing the property and that you know how much you can afford to spend. It also gives you time to get your credit report and financial information in order before making an offer on a house.
Mortgage pre approval is a letter from a lender indicating that they are willing to lend you money at a certain mortgage rate and terms, as long as you meet their requirements. It is not a guarantee that you will get the loan or the specific terms offered, but it does give you peace of mind that your financing is secure.
If you arent pre-approved for a particular amount, it is a good idea to talk with the lender about why they declined your application. Find out what factors they considered when determining your preapproval and ask for tips on how to improve your chances of getting approved in the future.
The most common reason for a preapproval to be rejected is that the lender found negative information on your credit report or credit score. These items can include bankruptcies, tax liens, charge-offs, missed payments or new collection accounts.
Another reason for a mortgage preapproval to be denied is that the lender changed their requirements after they issued the preapproval letter. They may have revised their guidelines to account for an increase in home prices, a change in income or a lowering of your debt-to-income ratio.
While it is possible to purchase a home without getting pre-approved, it can be difficult. It is best to seek pre-approval six months to a year before you begin house hunting so you have time to fix any issues on your credit report and to save for a down payment and closing costs.