March 18th, 2020 9:43 AM by Jackie A. Graves
is likely to be one of the biggest purchases of your life — and you’ll probably
need a loan to make it happen. Getting a mortgage preapproval can give you an
advantage while house hunting, and it’s almost a rite of passage as you go
through the process of buying a home.
through the preapproval process, you can show sellers that a lender has already
vetted you and will lend you money. The steps for getting preapproved for a
home loan include sharing detailed financial information about your income and
debt, and undergoing a credit check. Once you’re approved, though, you’ll have
a solid estimate that real estate agents and sellers can use to determine
whether you’re a serious contender for a home.
What is a mortgage preapproval?
mortgage preapproval is a statement of how much money a lender is willing to
let you borrow to pay for a house. It’s an important step in the home-buying
process. A preapproval is based on your financial situation, including
how much you have in bank and investment accounts and your income, as well as your financial
obligations, or what you owe. A lender also performs a hard credit
inquiry when determining preapproval for a home loan.
With all of
that, the lender can make a fairly informed estimate about how much house you
can afford. Your mortgage preapproval is a document that states that the lender
is prepared to move forward with the loan, as long as the home meets certain
qualifications and your financial situation doesn’t undergo a big change in the
Why should I get preapproved?
you’re preapproved, sellers (and their real estate agents) know you’re serious
about a home — and they know you can afford it. With a preapproval letter in
hand, you can show that a bank has already agreed to issue the mortgage. If you
look interested in a home and want to make an offer, the seller wants to know
that you can follow through. Without a preapproval, you could be passed over in
favor of someone who already has a lender and the funds lined up.
On top of
that, getting preapproved gives you an idea of how
much home you can afford. You can see how much money the lender
will give you, figure out a down payment, and know if the houses you’re
considering are practical. It saves time during house hunting to immediately
eliminate homes out of your price range.
How to get preapproved for a mortgage
all, understand that, because of the large amount of money involved in a real
estate transaction, you’ll need documentation proving your income and assets.
Some of the documents you’ll need to submit to your lender include:
Current pay stubs
Recent bank statements
Investment account statements
Identifying documentation, such as a
driver’s license or passport
are self-employed might also need to include information from business accounts
and undergo an income audit. This might include asking an accountant to verify
that your income is stable by speaking with customers, reviewing business
records and taking other steps. Find out from your lending institution what’s
required when you’re self-employed.
addition to providing documentation, you also have to agree to a credit check.
The lender will perform a hard inquiry, which can impact your credit score.
for mortgage preapproval, check your credit report. You’re entitled to a free
copy from each of the major credit bureaus once every 12 months. Obtain your
report at www.annualcreditreport.com and
review the information for mistakes. Errors can impact your credit score,
bringing it down, and this can impact whether you’re approved, as well as
whether you qualify for the best mortgage rates.
the information in your credit report to assess your credit utilization, or the
amount of credit you’re using relative to your total credit limit. The
lower your credit utilization is, the better your chances of getting
preapproved. Many lenders prefer to use the so-called “28/36” qualifying ratio
to figure out what monthly payment you can afford. In general, they like to see
a mortgage payment taking up no more than 28 percent of your gross monthly
income, and your total debt payments (which includes credit cards, car loans
and other debt in addition to your mortgage) accounting for no more than 36
percent of your gross monthly income.
important to note that, if you’re getting a conventional mortgage, you usually
need a credit score of at least 620 to qualify for a mortgage. You might be
able to get a mortgage preapproval with a lower score, and there are programs,
like FHA loans, that allow lower scores, but the higher your score, the lower
your interest rate.
How long does it take to get preapproved?
on the situation, and your finances, it can take up to a few days to receive
your mortgage preapproval. If you have to wait for an income audit, though, it
can take a couple of weeks to receive your preapproval letter. If you have
everything in order, and your credit looks good, though, it’s possible to get
preapproval for a home loan within one business day in some cases.
Preapproval vs. prequalification
important to understand the difference
between preapproval vs. prequalification.
prequalification, you’re often subject to a soft credit inquiry, just to get a
feel for your situation. Additionally, the lender often relies on your own
representation of your financial situation, rather than requiring
documentation. A prequalification is an indication of what you likely qualify
for, based on the information you give and the results of a less-invasive credit
check. While a prequalification can be useful when shopping around and
comparing potential loan terms, it’s not usually taken seriously by sellers and
real estate agents.
other hand, a mortgage preapproval is a more rigorous process. You provide
documentation to back up your claims and the lender reviews your credit report
in more depth to get a feel for your debt-to-income ratio and other information
to help them make a determination. Because a preapproval is backed up with
data, it’s accepted as proof that you can afford the home you’re looking at and
the bank will fund your loan.
you’re buying your
first home, or you’re a house-hunting veteran, getting a mortgage
preapproval on a home loan is a smart move if you want to remain competitive as
a home buyer. Your mortgage preapproval shows that a bank is ready to lend you
a certain amount of money, making an offer you put on a home a “serious” offer.
While it can feel burdensome to go through the documentation steps required to
get preapproved, it can actually save time and hassle in the long run.
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