What do you need for a pre-approval mortgage? Getting pre-approved for a mortgage is the most important step to take when planning to purchase a home. Pre-approval helps to verify whether you can get pre-approved for a mortgage loan. Also, it is a good idea in a market where competition among loan borrowers is very intense.
Pre-approval helps you to know if the lender is willing to provide the loan at a good stated rate. Also, it shows sellers that you are very serious about buying and how much you can borrow. However, before diving into the pre-approval process, there are certain things you need to know. Read on to know what you need for a pre-approval mortgage.
Understanding Home Loan Pre-approval
Mortgage or home loan pre-approval is the process of knowing the amount you can borrow to purchase your home. For you to get pre-approved, lenders will look at your assets, credit score, and income, and determine the home loan you can be approved for. And what your amount and interest will be.
What’s the Difference Between Mortgage Pre-Approval vs. Pre-Qualification?
Just so you know, preapproval and prequalification are not the same things. A mortgage prequalification is just like preapproval, but we can say it is not as accurate. With the prequalification, you don’t have to give much information and details about your income or finances and the lender will not pull your credit. You will only provide 20% of your debt, income, and assets. Also, the lender will give you an estimate on if you can qualify for the mortgage, the amount you can borrow, and interest rates.
However, Pre-approval is not like that. It is the next step after you get a good estimate during the prequalification process. During the Mortgage preapproval process, lenders will have to pull your credit report. And also review documents to verify your income, debts, assets, and other info. If you are ready to purchase a home and very confident about your financial and credit readiness. You can just skip the pre-qualification process and move straight to the preapproval.
What Do you need for Pre-Approval Mortgage– Requirements for Mortgage Preapproval?
Home loan pre-approval requires home buyers to complete applications and provide employment verification, proof of income, assets, and other essential information. Read the below for more explanation.
Proof of income
Borrowers must provide W-2 wage statements and tax returns from the last 2 years. And also provide current pay stubs that show year-to-date income. And proof of other additional income sources like employee bonuses or alimony.
A potential home buyer’s investment and bank account statement show that they have funds for required cash reserves, down payment, and closing costs. The down payment shows as a percentage of the selling price and varies by the type of loan the borrower wants. Many mortgages prompt buyers to buy private mortgage insurance. If the individual is not putting down up to twenty percent of the purchase price.
Good credit score
As a lender, most lenders require you to have a score of 620 or higher to approve you for the loan. 80% of lenders usually save the lowest rates for people with a credit score of 760 or even higher
Verification of Employment
Most lenders verify employment through buyers’ pay stubs and also contact their employer to confirm the borrower’s salary and employment status. Self-employed applicants provide more information and details such as the location stability of income, type of business, and, strength of the business. This allows the lenders to know the ability of the business to continue distributing and generating income for borrowers to make mortgage payments.
Other personal documents required for pre-approval for a mortgage include social security number, rent payment, authorization for a lender to pull credit report and record of divorce,
How to Get Pre-Approved for Mortgage
The process to get pre-approved for a mortgage is very easy. The following are the steps you need to follow;
Get a free credit score
It is advisable to know where you stand before visiting a lender. Just like I have mentioned above, you need at least a credit score of 620 to qualify for a mortgage. Also, If you are 740 or above you will be able to qualify for good rates. You need to focus on lenders who give loans with low scores and get a good score before going on the home-buying journey.
Check your credit history
Make sure you ask for copies of your credit reports and ensure to check out for any little errors. If you find delinquent accounts, solve it with your credits before getting preapproval.
Know and calculate your debt-to-income ratio
Use the online debt-to-ratio calculator to estimate and check your DTI (debt-to-income ratio) based on your prospective mortgage and existing debts. Most lenders prefer people with a DTI of thirty- six percent, though it can be very high sometimes. If your monthly debts are very high, you may have to solve them by paying down your debt before you take the home loan or refinancing.
Gather your financial account, personal information, and income
This will include your social security numbers, employment details, current addresses, and contact information. Also, you will you’re your investment and bank account info and proof of income. What you need for your pre-approval mortgage includes your 1099s and W-2 tax form. As a self-employed borrower, you will have to provide the last 2 years of income tax returns.
Contact more than one mortgage lender
Make sure you contact and compare more than one lender. This can help you save more money over a 30-year mortgage. Note that, your credit score may be affected temporarily because the preapproval involves a hard inquiry. You can get pre-approved online via the mortgage lender’s website by completing the mortgage application. Also, you can schedule an in-person interview with the lender to get preapproved or just go through the self-service approvals. The three ways are fast and easy ways for buyers to get pre-approved.
Do Mortgage preapprovals affect credit scores?
Just like I have mentioned above, Preapproval for Mortgage can affect your credit score because it counts as a hard inquiry. Grouping hard credit inquiries within 30 days period can help you reduce the negative impact on your credit score.
When is the right time to get mortgage pre-approval?
It is advisable to get pre-approved for a mortgage at least a year before you decide to purchase the home. Pre-approval is for your benefit, so it is never too early for you to get one. One of the best parts of getting it early is that 70% of mortgage applications contain an error. And these errors can affect your interest rate and ability to purchase a home negatively.
However, pre-approval helps to uncover these mistakes and gives you a good time to fix them. it also helps to set your process range. Preapproved buyers are likely to underspend or overspend on their homes compared to buyers who make use of online mortgage calculators.
Can I get denied a mortgage after being preapproved?
Yes, you can get turned down for a home loan despite being pre-approved. There are different ways pre-approval is not always welcomed. First, the individual credit score has dropped below the minimum credit score requirement. Secondly, if the buyer lost income or has piled on debt. Thirdly, the buyer’s job title or employer changed. Lastly, the housing monthly payment may be higher than pre-approved.
What if I don’t get pre-approved for a home loan?
Once your home loan application is gotten and reviewed by lenders, they will provide a decision to deny, or preapprove with conditions. These may require you to provide more documents and information. And also reduce your existing debt to meet the requirements of the lender. If you get denied, the lender will offer more options to help you improve your chances of getting preapproved.
How long does it take to get pre-approved?
Well, this depends on the lender and whether you qualify or not. However, just so you know you could get pre-approved in as little as 1 business day. But it normally takes up to 3-4 days or even one week to receive. If you have to go through other verifications, it may even take longer than that. Generally, if you have your documentation available and your finances and credit look amazing, it is very possible to get Pre-approved for a Mortgage quickly.