4 Steps to Take Before Applying for a Mortgage Pre-Approval
Getting pre-approved for a mortgage gives you the confidence to look for homes within your budget and speed up the home buying process. It also reassures sellers that you are serious about purchasing their home.
The pre-approval process involves a lender checking your credit score and verifying your employment history, income, and assets. It can uncover issues that would prevent you from getting approved for a mortgage.
1. Know Your Credit Score
If youre thinking of buying a home in the near future, its important to take steps to ensure that you can get pre-approved for a mortgage loan. This will make the process of finding a place to live much easier and may help you secure a better interest rate than if you were not pre-approved.
The first step in this process is to check your credit score. Your credit score is a number between 300 and 850, and it shows lenders how likely you are to pay your bills on time. It also tells them how much risk you pose if you are unable to pay your bill, which affects your interest rates and terms.
Your credit score is based on your financial information thats been reported to one of the three major credit bureaus. These include Equifax, TransUnion and Experian.
Having a high credit score is the best way to ensure you can get approved for a mortgage. But its not enough to have a high credit score; you must also have a healthy financial history and a low debt-to-income ratio.
You can check your credit score for free on a number of websites. These sites will pull your credit report and score from a credit bureau, and many of them offer free monitoring services that alert you to changes in your credit score or report.
There are a few things you can do to raise your credit score, such as paying bills on time, keeping your balances low and avoiding applying for new credit. Taking these steps will give you a jumpstart on building a good credit history, which can improve your chances of getting a mortgage loan with a lower interest rate.
If youre unsure whether your credit score is high enough to qualify for a mortgage, consider seeking professional credit counseling. These services are available at no cost to you and can help you determine where your credit score stands, explain the credit scoring system and help you develop a strategy for improving your score.
You can also work to build your credit history by opening a few credit cards with low credit limits and paying them off each month. It can take several months for this to be reflected in your credit score, so youll want to be patient as you establish and build your credit.
2. Know Your Income
If you’re planning on buying a home, it’s important to know your income before applying for a mortgage pre-approval. The amount you earn in a year can help you determine whether you can afford a home and how much you can afford to spend on the monthly mortgage payment and other housing expenses.
Generally, lenders use your gross income to calculate your mortgage qualification. This includes the income you receive from your job, as well as any money you get from investments or other sources.
The more accurate your gross income is, the better your chances of getting approved for a mortgage loan. This is because your income is often used in conjunction with other factors such as your credit score and debt-to-income ratio to determine if you’re eligible for the mortgage you want.
To calculate your annual income, you must know how many hours you worked in a given year. You can do this by multiplying your hourly wage by the number of hours you worked per day or week.
You also need to keep track of other forms of income, including social security and pensions. If you receive alimony or child support, that money is considered part of your income as well.
Lenders typically require two years of tax returns and W-2s to verify your employment history. If you’re self-employed, you may need to provide a business tax return as well.
In addition, you must provide 60 days of bank statements to prove that you have the funds to make a down payment and cover closing costs. These documents can include pay stubs, tax forms and investment account statements.
Once you have your information together, it’s time to fill out a loan application. This process can take up to a week or more, depending on the lender and the complexity of the mortgage.
After you submit your application, the processing team will review it to ensure all of the information is correct and complete. They’ll then send your file to a mortgage underwriter, who will look over it for any red flags or missing information. Once underwriting is completed, the lender will give you a final approval.
3. Know Your Assets
A lender wants to know that you have enough assets to cover your down payment and closing costs. This includes money in your checking and savings accounts, cash in your retirement account and any other investment accounts you may have.
Lenders also want to see that you have the income you need to make your mortgage payments. They usually want to see your most recent W-2 statements from current and previous employers. Theyll also look at tax documents, including your last two years of tax returns and your pay stubs.
Your assets are the things you own that have a monetary value, such as your house, car or jewelry. List these items on your mortgage application and your lender will take them into consideration when evaluating your application for home loan approval.
The asset that has the most weight is cash and cash equivalents, like the money in your checking and savings accounts. These can be accessed quickly in case you need to make a payment.
Another important asset is your credit score. This will help your lender decide whether to approve you for a mortgage and what interest rate theyll offer you. It can also reveal any red flags, such as late or missed payments, significant debts and a history of bankruptcy.
Having an accountant review your finances before you fill out any loan paperwork can help ensure that you have all of the assets you need to qualify for a mortgage. Talk to a trusted friend or family member, reach out to your real estate agent or do some research online to find the best accountants in your area.
Once you have all the information you need, its time to start the home loan application process. This can take anywhere from a few days to several months, depending on how complex your finances are.
If you have the right assets, your credit score and a reasonable down payment, youll likely get approved for your home loan. However, if you have lots of debt, a low credit score or a history of foreclosures, the preapproval process can take longer.
4. Know Your Loan Terms
Mortgage pre-approval is when a lender says it’s willing to lend you money for a home. It’s an important step in the homebuying process because it helps you understand how much house you can afford, and what loan terms are available to you.
A lender will want to check your credit history and financial profile before issuing you a mortgage pre-approval. It will also want to verify your employment and income, and assess your debt-to-income ratio (DTI), which is a calculation of how much of your monthly income goes toward paying off your total monthly debts, including your mortgage.
Lenders are generally looking for a DTI of 50% or lower, but the exact number depends on the loan type and your individual situation. If you’re a first-time homebuyer, you may need to get a higher DTI or pay off some of your other debts before you can qualify for a mortgage.
Once the lender verifies your application, you’ll receive a letter that states the amount of the loan you are preapproved for and any interest rate you might be eligible for. This letter is typically valid for 90 days, and you can renew it by resubmitting your documentation and credit information.
You can get pre-approved with just one lender, but it’s a good idea to go through the process with several lenders before you find a home. This way, you can shop around for the best mortgage rates and terms.
Many lenders require additional documents before they’ll approve a mortgage, and if you don’t have all of them at the time you apply for your preapproval, it can delay your homebuying process. That’s why it’s a good idea to talk with a few lenders and ask them about any extra documentation they may need, especially if you have questions.
In addition, getting preapproved can help you determine what you can spend on your next home and show a seller that you’re a serious buyer. This is particularly useful in a competitive market, where you may need to stand out from the crowd to make a strong offer.