Buying a home can be a stressful process, whether you’re a first-time buyer or have been buying real estate for decades. Not only is there the emotional anxiety over finding a home that you like and is in good condition, there’s also the pressure to make sure you get approved for a mortgage. Plus, even if you find the home of your dreams, you still have to put in an offer and hope that it’s accepted with no competition from other buyers. Luckily, there’s a way to not only stand out against other home buyers, but also to expedite your mortgage approval process. By getting pre-approved for a mortgage before you even put in an offer on a home, you can greatly increase your chances of having your offer selected.
What is a mortgage pre-approval?
A mortgage pre-approval refers to a letter from your lender indicating that you meet the standards for a home loan within a certain price range. The lender has performed an in-depth review of your credit, income, and other financial indicators, and put them through the automated underwriting system. Pre-approvals are typically valid between 60 and 90 days.
Why is it worth getting pre-approved before you start house hunting?
There are a couple of benefits to getting pre-approved in advance of viewing houses. One of the most important factors is that it strengthens your offer when bidding on a home that you love. Many deals fall through because of financing issues even after an offer is accepted by the seller. If you have a pre-approval letter to submit as well, the seller knows that the deal is more likely to close by accepting your offer than someone else’s.
Getting a pre-approval letter also gives you a chance to see how large of a loan you’ll be approved for, helping to narrow down your home search to the right price range. You’ll also find out what types of loan you qualify for, whether it be a conventional, FHA, VA, or other mortgage. Some of these loans have certain restrictions on the type of property you can purchase and what condition it must be in. Some also require a certain down payment percentage. If your down payment is less than 20%, you’ll likely have to pay private mortgage insurance (PMI), which is also based on the loan amount. Getting pre-approved helps you financially prepare for the full cost of your new home and your monthly payments.
Once you determine your target loan amount, you’ll know what your monthly principal, interest, and mortgage payments will look like. When you know that, you can then look at individual properties to determine how much property tax and even homeowner’s insurance you’ll need to tack on to each month’s payment. You need to consider all of your fees before finalizing your maximum home price, otherwise you could be unpleasantly surprised when you get your first mortgage bill.
What should you do before applying for pre-approval?
The best thing to do before you talk to a lender about getting pre-approved for a mortgage is to check both your credit report and credit score. You can access your credit reports from each of the three credit bureaus for free once every twelve months. Get started a few months before you’ll be house hunting to give yourself time to address any issues. You might have outdated information lingering on your report, or even incorrect items. The dispute process can take some time and you want to make sure your credit report is as strong as possible so you can get approved and get the best rates possible when the time comes.
There are a couple of free websites like Credit Karma that give you access to your credit score. It might not be the same exact number that your lender will use, but it still lets you know what ballpark you’re in. If your number is lower than you’d like to see, you have time to make some quick fixes. For example, you can get a higher credit card limit to decrease your credit utilization ratio or pay down extra debt to lower your debt to income ratio. A little planning in advance can help strengthen your chances for pre-approval before you even contact a lender.
How do you get pre-approved for a mortgage?
When you’re ready to start the pre-approval process, your lender will ask you for several pieces of information, including tax statements from the last two years, pay stubs to verify your employment and income, and bank statements. You’ll also have to provide your social security number and sign a form giving the lender to perform a hard inquiry on your credit report. At that time, he or she will also request your credit score to use in the evaluation process. Because underwriting systems are now automated, you can actually get pre-approved in a matter of minutes.
When the underwriting process is completed, you’ll either receive one of four responses. Here’s what they are and what they mean:
- Approved: your initial mortgage pre-approval has gone through with no conditions
- Approved with conditions: you must complete additional steps before getting approved (for example, providing extra income verification to the lender)
- Suspended: you must answer additional questions before the underwriter determines whether or not you’re approved
- Declined: your application did not get approved
Many lenders state that it’s actually quite rare to be approved with no conditions on your first attempt at getting a mortgage pre-approval. So don’t be disheartened if this happens to you — you’re in good company! Even a suspended application isn’t the end of the road. And if your file is completely declined, make sure you ask the lender why so that you can take targeted steps to improve the weak areas in
What’s the difference between pre-qualified and pre-approved?
When you first contact a lender about qualifying for a mortgage, you’ll probably talk about your basic financial picture to help you determine how much of a loan you’re likely to get approved for. This is referred to as pre-qualification for a loan. They don’t access your credit report or request any financial documentation, but instead they give you an idea of loans you’d qualify for based on the information you provide. If you give false information, your application will definitely fall apart in the underwriting process, so it’s important to be honest and as accurate as possible. Otherwise, it’s a waste of your time. Getting pre-qualified is a smart move to inform yourself on your mortgage options, but it’s not strong enough to submit with an offer on a house.
Pre-approval, on the other hand, proves to sellers that you’ve already been through the preliminary underwriting process and your financing is likely to go through all the way. In this instance, you do submit all of the necessary financial documentation to your lender. Not only does it strengthen your offer when you find a home you like, it also speeds up the next steps in the mortgage process so that you can close more quickly.
Does it matter what lender you use for pre-approval?
Getting a pre-qualification before a pre-approval may seem like an unnecessary step, but it’s a great way to interview the lender as much as they’re interviewing you. At the end of the day, lenders are competing for your business so don’t just choose the first one who gives you a pre-qualification or approval. There are several factors to consider before you make this important decision.
Start off with an interest rate comparison. You should be able to get quotes based on your basic financial information, without the lender performing a hard pull on your credit report. Also consider how much money the lender says you can afford. They don’t know how much your other bills are, or how much you’re comfortable spending. If they try to pressure you into a loan amount that seems like it would be too expensive based on the monthly payments, they may not have your best interests at heart. A good lender wants to make sure you can actually afford your payments each and every month, and is transparent about costs beyond your principal and interest.
You can also ask lenders what kind of perks they offer. Some give their clients one free float down before closing, which means if interest rates have dropped since you locked in your rate, you can get that lower rate without having to pay any additional fees or points. Others offer discounts on closing costs to clients in public service professions, such as teachers, police officers, and firefighters. Even if a particular lender doesn’t always offer any of these services, you can reference another one that does in order to negotiate your own special deal.
Your Mortgage Pre-approval Checklist
- Check your credit report and score.
- Find a trustworthy lender.
- Get pre-qualified to find out what type of loans you’re eligible for.
- Gather financial documentation such as pay stubs, bank statements, W-2s, and tax returns from the last two years.
- Apply for pre-approval letter to seriously begin your home search.