Purchasing a home is a major financial decision, and for many, it’s a dream come true. But the truth is that, for a great percentage of Americans, taking out a mortgage is the only way to make it possible, resulting in the most sensible and realistic path to homeownership. In this sense, securing a mortgage pre-approval is one of the most important steps during this process, as it helps you determine how much you can borrow and gives you a clearer understanding of your budget.
Additionally, it also represents a critical part of the home-buying journey, since it’s an effective way of proving to your sellers that you are a serious and qualified buyer. In this guide, we’ll break down how the mortgage pre-approval process works and what steps are involved to make it as smooth as possible. So, join us and learn everything a home buyer needs to know to get preapproved for a mortgage loan.
What is Mortgage Pre-Approval?
It consists of a document, usually a letter, that your lender provides after evaluating your financial situation so they can determine how much you can borrow for a home purchase. This document is then a statement that you obtain after getting examined: it involves a lender reviewing your financial documents, including your credit history, job history, income, debt, and assets. Based on this evaluation, they’ll issue a pre-approval letter that outlines the loan amount you qualify for, the interest rate you may receive, and other important details.
While it may sound similar to mortgage prequalification, pre-approval is a more in-depth and reliable process. The first one is typically a quick, informal estimate of how much you might be able to borrow, often without a full review of your financial situation. Pre-approval, on the other hand, provides a more accurate picture of your borrowing potential and is based on actual documentation, so this is typically the document that will be useful to provide when you’re interested in a property.
And, just as prequalification differs from pre-approval, actual mortgage final approval is a different thing too. You have to consider this, as the pre-approval doesn’t guarantee you a loan: it’s just one step forward for getting the final approval you need.
Why is this Document Important?
While it is not, as we pointed out, the mortgage final approval, getting preapproved is crucial during your house-hunting process due to these advantages:
- It Helps You Understand Your Budget: Before starting your home search, knowing your preapproved loan amount can help you determine what price range you should be looking at. It prevents you from wasting time on properties that are beyond your financial capacity.
- It Increases Your Chances of Getting the Home You Want: Many sellers prefer to negotiate with buyers who have been preapproved for a mortgage. It demonstrates that you are financially capable of following through on the purchase, which can be crucial in a competitive housing market.
- Speeds Up the Home Buying Process: Since much of the paperwork and financial vetting has already been completed, the process of closing the deal on your home can proceed more smoothly and quickly.
How to Get Pre-Approved: Step-to-step
Most of the time, you won’t need to go to a local bank branch to get preapproved for a mortgage; although, it’s possible for those who prefer to do things in person. But, for those who’d rather manage this step of the process virtually, it is possible to submit an online application and speak to a lender over the phone.
Please note that pre-approval letters have an expiration date: they’re typically valid for 60 to 90 days. Lenders usually state this time because a person’s finances and credit profile can vary over a couple of months. If your pre-approval has expired, you have to fill out a new mortgage application by submitting updated paperwork. So, if you’re wondering which time is ok for getting this letter, we suggest you request your application once you’ve found properties you’re interested in and that you might make an offer for.
After noting these key aspects, let’s take a look at the step-to-step guide on how to get your mortgage pre-approval:
1. Choose a Lender
The first step in the pre-approval process is to choose a lender. You may pick a bank, a credit union, or a mortgage broker, depending on your preferences. It’s important to shop around and compare rates and terms before committing to a lender. Many lenders offer online pre-approval options, making it convenient to start the process from home. We also suggest you try different lenders so you can get various options to compare which rate they offer is more convenient for you.
As a useful tip, if you’re getting a preapproved letter from different lenders, we recommend you conduct them within a 45-day timeframe so they can count as a single hard credit inquiry, letting the credit bureau figure these are all for the same loan: the house you’re planning on investing in. Proceeding like this won’t affect your credit score.
2. Provide Personal and Financial Information:
Once you’ve chosen a lender, you will need to submit various financial documents. These typically include:
- Proof of income: Recent pay stubs (at least the past 30 days), tax returns, or proof of other income sources, like bonuses, commissions, child support, etc.
- W-2s from the past two years
- Credit report: The lender will perform a credit check to assess your creditworthiness. This is a key factor in determining the interest rate you’ll receive.
- Employment history: Lenders like to see a stable work history, so be prepared to provide information on your job and how long you’ve been employed.
- Debt information: A list of your outstanding debts, such as student loans, car payments, or credit card balances.
- Assets: Bank statements, retirement accounts, and other assets to show your ability to cover your down payment and closing costs.
- ID: So lenders can verify your identity. You can submit your driver’s license or passport.
For Self-Employed Borrowers:
Self-employed borrowers are often asked to provide additional documents that will prove them a consistent income and job history, both of at least two years. These documents may include a business license, profit and loss statement, federal tax returns, balance sheets, and your business accountant’s signed statement. If the business has a physical location, it’s important to detail this information too, as the location and nature of the business can also be an improving factor.
3. Credit Check and Financial Review:
After receiving your documents, the lender will conduct a thorough review of your financial situation. This includes analyzing your credit score, debt-to-income ratio, employment history, and the total value of your assets. The lender will use this information to assess the risk of lending to you and determine how much they are willing to lend.
Of course, your credit score plays a big role in determining your mortgage terms. Higher credit scores generally result in lower interest rates, which can save you money in the long run. If your credit score is lower than ideal, you may need to work on improving it before applying for the process of getting this letter.
4. Receive Your Pre-Approval Letter:
If the lender is satisfied with your financial standing, they will issue your corresponding letter. This document specifies how much you are pre-approved to borrow and the expiration date of the letter, along with details such as the loan type, interest rate, and estimated monthly payments. Keep in mind that this pre-approval is based on your current financial situation and is subject to change if your circumstances change before you close on a home.
5. Use Your Pre-Approval in Your Home Search:
With your letter in hand, you can start your home search with a clearer understanding of your price range. The pre-approval letter gives you the confidence to make offers on homes, knowing you have the financial backing to support the purchase.
We highly recommend you to not make any major financial changes after you’ve obtained this letter, such as quitting your job, taking on large amounts of debt, or making large purchases. These actions could affect your loan process. Remember that this document is not the final approval for a mortgage loan.
By following these simple steps, you can guarantee your sellers and yourself the confidence to be ready to begin your home-buying journey, making the process more efficient and less stressful. Take the time to gather all the required information you might need so you can be in a better position to find the home you dream about and move forward with the purchase once the right property comes along.
