Congratulations! You’re ready to buy a home, but first, you’ll need a mortgage. The pre-approval process can seem intimidating at first, but it’s really quite simple once you know what to do. We’ve put together this guide to help you get through the process as smoothly as possible.
What is a mortgage pre-approval?
A pre-approval is a lender’s approval of your ability to borrow money. It means that you have been evaluated and approved for a mortgage loan, but it is not a commitment to lend.
In fact, it’s possible that the bank will decide not to give you the loan after you have done all the paperwork and completed negotiations with them.
If they are willing to go ahead with actually lending you the money, they will then send out an official offer letter or an ‘offer document’ which contains all their terms and conditions in writing.
How does the pre-approval process work?
Mortgage pre-approval is a process that determines how much money you can borrow and what your monthly payments will be. It’s important to understand the difference between a mortgage preapproval letter and actual mortgage approval.
You get the full loan approval when you’ve already found your dream home, negotiated the price through your real estate agent, gotten mortgage rates quotes from multiple mortgage lenders, and are ready to close on the deal. Pre-approval gives you an estimate of how much money you qualify for before going out looking at houses so that you can find one within your budget.
The first step in getting pre-approved is asking yourself some questions:
What kind of house do I want?
How much am I willing to spend?
What do I need my monthly payment to be?
Do I want a 30-year mortgage or a 15-year one?
Carefully consider your financial situation.
Before you start the process of getting a mortgage, it’s important to make sure that you can afford your monthly payments.
Do I have enough money for all of my bills?
How much will it cost me to pay property taxes and insurance on this property?
Am I willing to make a down payment on this property?
Can I afford closing costs and other expenses associated with buying this house?
If you answer “no” to any of these questions, then getting pre-approved might not be right for you.
Determine how much house you can afford.
To determine how much house you can really afford, it’s important to consider all of your expenses.
In addition to the mortgage payment, taxes, and insurance (commonly known as PITI), you’ll also need to factor in money for repairs and maintenance. And then there’s the down payment—it will be easier to get pre-approved for a loan if you have at least 20% but you can put as little as 5% down for a conventional loan and 3.5% for an FHA loan.
Get an idea of how much you’re able to borrow.
Once you’ve gathered your information and set up an appointment, the lender will run a credit check, which checks for things like late payments or large amounts of debt. They may also ask for financial documents showing income and assets. Once they’ve evaluated your finances, they’ll be able to give you an idea of how much you can afford.
The pre-approval process isn’t just about finding out what the monthly payment might look like—it’s also a way to get a better understanding of the mortgage process in general so that when it comes time to shop for houses, you’ll know exactly what kind of loan product will work best for your situation.
Check your credit score.
Before you begin the process of applying for a mortgage, you should check your credit score. A credit report is a history of your financial activity and how well or poorly you’ve managed it. The higher your score, the better—and vice versa.
To get an idea of where you stand, visit annualcreditreport.com and get a free copy of each of your three reports from TransUnion®, Equifax®, and Experian® once every 12 months (you can request one report at no cost each year).
You can work toward increasing it by making sure all payments are made on time or earlier than scheduled; paying off debt; keeping open accounts but only using them when necessary; checking for errors on any records; not opening new accounts unless absolutely necessary, and not using payday loans or cash advance loans.
Clean up your credit history.
In order for you to get a mortgage, the lender wants to see that you have a good credit history. This means that there are no negative marks on your credit report and that it is clean and up-to-date.
To make sure things are in order, we recommend:
Check your credit report for errors or mistakes. It’s important to check this first because lenders will look at this as well when deciding whether or not they can lend you money based on your income.
Pay off any delinquent accounts that are still on your credit report (over 180 days late).
Pay off any collections or judgments against you (debt collectors may have purchased these debts from original creditors).
Close any unused credit cards which aren’t in good standing with their issuer (make sure all payments have been made on time)
Save up a down payment.
If you want to buy a house, saving up for a down payment is the first step.
You’ll need at least 5% of the purchase price as a down payment in order to qualify for most mortgages. This money can come from savings or gifts from family members and friends. You can also use funds from home equity loans, but keep in mind that if this option isn’t available to you or if it’s not used responsibly, it could result in foreclosure.
Gather documents for mortgage preapproval.
List of documents needed for mortgage pre-approval:
Proof of income, such as pay stubs or W-2 forms from the past two years.
Tax returns and supporting documentation (1040, 1099) for the past two years. A copy of your most recent tax return is ideal; if you don’t have it, start looking at older ones going back to 2015. You can access your credit report online at Credit Karma.
Get quotes from at least three lenders.
Always get quotes from multiple lenders. Once you’ve found a lender who will pre-approve you, get quotes from at least three other lenders. This is important because it’s the only way to know whether or not the interest rate being quoted by one lender is competitive.
For example, say that I’m currently paying 5% on my current mortgage and want to refinance it into a 30-year fixed loan with 20% down. If my credit score is good enough for me to get approved for refinancing through Lender X for 7%, but Lender Y quotes me 9%, then I might go with Lender Y even though their rate is higher because:
They have better customer service and are more accessible
They offer more useful services like online bill pay
Provide details about your employment and income.
Provide details about your employment and income.
You will need to provide information about your employment history, including the amount of your monthly income, how long you have been employed with this employer, and what you do for a living. If you are self-employed or unemployed, it is important for lenders to understand how long it has been since you were last employed and what type of work experience you have had.
Lenders also want to know your gross monthly income – how much money you make each month before taxes are taken out from any wages or commissions.
In addition to providing a detailed description of what type of jobs or businesses people perform on a daily basis (such as “garbage collector” or “musician”), applicants should include whether their jobs are full-time positions with benefits; part-time positions without benefits; seasonal jobs; temporary assignments lasting no longer than six months at most; etcetera..
Provide information about your assets and liabilities.
In order to get pre-approved for a mortgage, you’ll need to provide information about your assets and liabilities.
Assets include savings, investments, and property. Liabilities include credit cards, loans, and lines of credit. You’ll also need to provide details about your employment history and any other income sources (such as pensions or rental properties).
It’s important that you’re honest with the lender about all this information—if they discover later on that anything is missing from what you’ve provided them with originally, it could result in termination of the preapproval process or even cause an application for a mortgage loan to be rejected.
Submit an application for preapproval.
To get preapproved, you’ll need to fill out an application form and submit it through a lender. The application will ask for personal information such as your name, address, phone number, and email address. It will also require details about your income and employment status as well as details about assets and liabilities that may be listed on the loan
The lender will use this information to determine whether you’re eligible for a mortgage loan at the amount they’re offering—and if so, how much of a down payment you should consider making
Get pre-approved by a mortgage lender.
Once you’ve established how much you can afford to spend on a new home, the next step is to get pre-approved by a lender. The goal here is to show your mortgage broker that you are ready and willing to begin the buying process.
What exactly does preapproval mean? A lender will look at all of your financial information and determine whether or not they can finance your loan. If they think they can, then they’ll give you an offer letter stating this information—and let’s not forget about those interest rates! A good rule of thumb for obtaining a low-interest rate is being able to close within 30 days (or sooner).
Ask your lender about special loan programs for first-time homebuyers.
Your lender may also have a list of special loan programs for first-time homebuyers. These programs can provide you with a lower interest rate, more favorable terms, and even a larger loan amount. To get the most out of your mortgage experience, ask your lender about these options before you start shopping for a home.
Additionally, it’s important to make sure that the information provided by your real estate agent or broker is accurate and up-to-date.
Does getting a mortgage pre-approval hurt your credit?
Because a mortgage pre-approval is based on your current financial situation and not your credit score, it should not hurt your credit.
In fact, getting preapproved for a mortgage is a positive step toward buying a house in the future. The lender will only look at your debt-to-income ratio and other factors that are related to financing instead of looking at past charges or accounts closed with unpaid balances. Once you have been approved for the loan amount you requested, you can shop around for homes knowing how much money you will have available as well as what type of interest rate/payment plan works best for your budget.
What do I need in order to get mortgage pre-approval?
For a mortgage pre-approval, you will need to provide the lender with your personal information and financial information.
The following are some of the items that may be required:
Your name, address, and Social Security number
A copy of your driver’s license or passport (if applicable) and/or picture ID for yourself and anyone else who will be on the loan. If you have a co-borrower on this loan, they will also need their own picture IDs (they should both have copies made at the same time).
Your birth date (must be correct). For example, if your birthday is July 1st but it says June 30th in one place and September 30th in another place, this would be an issue for them to resolve before processing any paperwork.
You’ll also need documentation showing proof of income like W2s from employers or 1099 forms from freelancers/contractors; proof of assets like bank statements showing all accounts held by each person who has signed up for the mortgage; and documentation showing current debts owed such as credit card bills or student loans (they must include balances due not just minimum payments made each month).
How long does mortgage pre-approval stay valid?
When you get pre-approved for a mortgage, the lender will run your credit report and check your income. Depending on what they find, they may approve you to borrow up to a certain amount of money or not.
There’s no deadline for when that approval expires—but if you haven’t managed to get approved yet and are still looking at homes, it’s best not to wait too long before getting back in touch with them. If they can’t reach you after several attempts, they may decide that the deal is off.
If the lender does give you an approval letter with an expiration date printed on it, check how long it lasts: 90 days is common but some lenders offer shorter terms (such as 30 days). That’s because once homebuyers receive their pre-approval letters from their lenders, many will contact other lenders asking them if they are willing to give them a more favorable rate—which means that borrowers may have multiple approvals floating around at once! If this happens and one of those approvals expires before another takes effect, things could get confusing fast
How much money will my mortgage pre-approval amount be?
The amount of money your mortgage pre-approval will be based on is your income and credit history. You can get an idea of how much house you can afford with a free online mortgage calculator. You just need to enter the details about yourself, such as your annual income, savings, and debts like credit cards or student loans.
It will also ask for information about the type of property you’re looking at buying and its value so it can work out what size loan you could manage without putting yourself in financial trouble if interest rates rise sharply in future years.
If you want to reduce that risk even more then speak to a loan broker who can help find a lender offering lower rates than advertised by banks such as NAB (National Australia Bank) or Westpac (Westpac Banking Corporation).
Getting pre-approved for a mortgage will help you narrow down where you’re looking in your price range, and lenders are eager to work with first-time homebuyers who have good credit scores and steady income.
It’s also a good idea to get preapproved before you start looking for a home if possible; this way, when an opportunity comes up that might not otherwise be affordable without the financing lined up, you’ll know whether or not it’s doable—and how much of what types of repairs need to be done before closing.
Getting preapproved usually takes less than 1 day, so there’s no reason not to do it right away if the time is right. In fact, since most mortgages don’t require any money down (other than possibly an initial payment toward some closing costs), getting preapproval can even help your chances of snagging a dream home as soon as it goes on the market!
Getting pre-approved for a mortgage is not as difficult as it seems, and it can give you peace of mind about your home-buying future. It’s important to remember that getting pre-approved does not mean you are required to purchase a home, but it does show lenders that you are serious about buying one. The most important thing is to start early so that when you find the right house, it won’t be too late!