How to Get Pre-approved for a Mortgage?

How to Get Pre-approved for a Mortgage?

A pre-approval letter from a lending institution can be a crucial step in the home-buying process. Preapproval letters allow you to discuss loan options and with a lender; this step can help you to better understand your total house-hunting budget and the monthly mortgage payment that you can afford.

As a borrower, it is critical to understand what a mortgage pre-approval is (and isn’t) and how to improve your chances of getting one.

Pre-approval Is a Financial ‘Physical Exam’

Before deciding to pre-approve you for a mortgage, lenders will consider several key factors:

• Your credit history
• Credit score
• Debt-to-income (DTI) ratio
• Employment history
• Income
• Assets and liabilities

Consider a mortgage pre-approval to be a financial physical. Lenders will most likely probe every aspect of your financial life in an attempt to ensure that you will repay your mortgage.

Pre-qualification vs. Pre-approval

You have probably heard the terms “pre-qualification” and “pre-approval” used interchangeably, but they are not the same thing. A pre-qualification is a summary of your finances, income, and debts that you provide to a mortgage lender. The mortgage lender will then provide you with an estimated loan amount.

As a result, a mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on a home purchase.The lender, however, does not obtain your credit reports or verify your financial information. As a result, pre-qualification is a useful starting point for determining what you can afford but has no bearing when making offers.

A pre-approval, on the other hand, entails filling out a mortgage application and providing your Social Security number so that a lender can run a hard credit check. When you apply for a mortgage, you will be subjected to a hard credit check. Before deciding to lend you money, a lender will pull your credit report and credit score to assess your creditworthiness. These checks are recorded on your credit report and have the potential to affect your credit score. A soft credit check, on the other hand, occurs when you pull your own credit or when a credit card company or lender pre-approves you for an offer without your asking. There is no impact on your credit score from a soft credit check.

In addition, you will list all of your financial accounts, assets, debts, employment history, and other pertinent information that a lender will need to verify. The reason for this is that a lender, above all, wants to ensure that you will be able to repay your loan. Lenders will also use the information you provide to calculate your DTI ratio and loan-to-value (LTV) ratio, which are important factors in determining your interest rate and loan type.

Because of this, a pre-approval is far more valuable than a pre-qualification.In order to approve a specific loan amount, the lender must have checked your credit and verified your documentation. Final loan approval occurs after an appraisal is completed and the loan is applied to a property.

When to Get a Pre-approval?

Typically, mortgage pre-approval letters are valid for 60 to 90 days. Because your finances and credit profile may change, lenders include an expiration date on these letters. When a pre-approval expires, you must complete a new mortgage application and provide updated documentation to obtain another one. If you are just starting to consider buying a home and suspect you will have trouble getting a mortgage, going through the pre-approval process can help you identify credit issues—and potentially give you time to address them.

A year or more before you start looking for a home, get pre-approved for a mortgage to help build your credit. You will have more time to save for a down payment and closing costs as well.

When you are ready to make an offer, a seller may request a mortgage pre-approval and, in some cases, proof of funds to demonstrate that you are a serious buyer. Because of intense buyer demand and a limited number of homes for sale in many hot housing markets, sellers have an advantage; they may be less likely to consider offers without pre-approval letters.