How to Get Mortgage Preapproval

How to Get Mortgage Preapproval
22nd May 2024
Admin

Prepare yourself to share information about your work history, income, debt, and financial accounts to be able to get preapproved for a mortgage.

Preapproval for a home loan is a key and strategic step during the house hunt. A lender can help you compare different loans and refine your budget to get a pre-approval letter, which will make your offer stronger and your journey to homeownership clearer.

This step can help you determine how much you can afford for a monthly mortgage payment as well as the overall budget for your home search.

Let's discuss what getting  pre approved mortgage loans mean and how to get one.

Key Takeaways

  • To be pre-approved, you will need to gather certain documents, such as tax forms, bank account details, Social Security numbers, and proof of income. (Keep a pre approval documents checklist handy.)
  • Preapproval is a more involved procedure that is best suited to borrowers who are ready and motivated to buy, whereas pre-qualification is a more informal way to assess your preparedness to buy a home.
  • Before applying, make sure all of your financial matters are in order.
  • It's likely that your preapproval will expire in three months or less.

What is a Mortgage Pre Approval?

Discovering how much money you can borrow to buy a house is called mortgage preapproval. Lenders review your credit score, assets, and income throughout the mortgage preapproval process. Your loan eligibility, loan amount, and potential interest rate are all determined by this information.

The prefix “pre” of the word “pre-approval” stands for preliminary, meaning that before you close, the lender must still verify all of your information.

A preapproval gives you the go-ahead for a house loan after your finances are reviewed. Finding a house, negotiating its price, getting an assessment to make sure the house's value matches the sales price, and checking the title history to ensure you can become the owner of the house are still necessary.

Home Loan Preapproval Vs. Prequalification

Prequalification for a mortgage is similar to preapproval, however it might not be as precise. Your lender won't access your credit report and you won't need to submit as much financial data when you get prequalified.

It's crucial to understand the  difference between pre-qualification and pre-approval, and when you'll require them while purchasing a property. Consider these key differences between a home loan pre-approval and pre-qualification.

Pre-Qualification Pre-Approval
Utilises data of the annual income estimations provided by the property buyer. Uses federal mortgage requirements, such as depreciation add-backs and government benefit multipliers, to verify a home buyer's income.
Uses the estimations of savings and assets provided by the home buyer. Incorporates official mortgage criteria to verify the assets and funds of a property buyer.
Leverages the home buyer's projections of their monthly expenses and commitments. Conducts a credit analysis to identify long-term and revolving debt.
Does not account for other mortgage disqualifiers such as payment shock. Confirms two years' worth of housing payments in order to account for irregularities such as payment shock

Home Loan Pre Approval Vs. Approval

Having a preapproval helps while searching for a house. But as soon as you find your house, you'll need to obtain complete approval. Obtaining a preapproval before starting your property search does not ensure approval. A home loan approval requires your lender to review every detail of the property.

Your lender will require the following property information to give you approval:

  • Appraisal Value: To ensure that you are not paying more for the home than it is truly worth, your lender will request an appraisal of the property. Your loan may have issues if the appraisal results show that the purchase price was not fully paid.
  • Title: In order to verify who owns the property and ensure that there are no liens or claims against it, your lender will collaborate with a title company.
  • House Condition: Before the loan may close, some loans, such as Federal Housing Administration (FHA) loans, have requirements that the property must fulfill. Problems such as broken windows, broken handrails, or a bad roof could prevent an FHA loan from closing.

How To Get Preapproved For a Mortgage

Pre-approval for a mortgage is an important process that takes place during home buying. Follow these simple steps to secure your pre-approval:

1. Check Your Credit Score:

The key is to begin with the basics of a credit report and score. Having a longer credit history allows you to improve your standing as a borrower and ensures a higher chance of loan approval and better terms.

2. Gather Financial Documents:

Gather finance evidence like pay stubs, tax returns and bank statements, which demonstrate your status.

3. Contact Lenders:

Contact different lenders and compare their rates and terms. Look for a credible loan company that is offering preapproval.

4. Complete Application:

Fill in every information on the lender’s preapproval application form. Submit all necessary documents to prove our financial information.

5. Await Decision:

When your application is submitted, the lender will verify all the details that you provided and determine whether you fit their requirements. Wait for their decision patiently.

6. Receive Pre-Approval Letter:

You will also receive a pre-approval letter indicating the loan amount you are eligible for, after approval.

7. Check How Long Pre-Approval Lasts:

Preapproval typically lasts 60-90 days. Check the expiration date and renew if necessary by updating your financial and credit information with the lender.

The Benefits of a Mortgage Preapproval

Having a mortgage pre-approval will assist you in identifying possible obstacles before starting your home search. These are some of its benefits:

Helps Calculate Price Range

You can save time during your property search by concentrating on the homes that fall within your budget after you know how much you can spend. After reviewing your application, a lender will inform you of the maximum amount they are willing to loan you depending on your assets and income being validated.

Be a Strong Purchaser

Lenders are assured that your offer is legitimate when you have a mortgage pre-approval as your financing is guaranteed. If the lender is certain that the process won't fall through because you can't acquire financing, your offer may be superior if there are other bids for the house.

Higher Negotiation

Compared to purchasers who have not been pre-approved, you have more negotiating power over conditions and price with a pre-approval. A pre-approval indicates that you have good credit and can afford the house, even if there are other buyers vying with you for the same property.

Quick Route to Closing

The lender's system already contains a large portion of your financial data, so this usually expedites the closing process. This is cited by well-known financial advisors as one of the main benefits of obtaining a mortgage pre-approval.

How Far Ahead of Time Should I Seek a Mortgage Preapproval?

A lender who offers you a mortgage preapproval will provide you a specific amount under predetermined conditions. This offer ends after a predetermined time period usually 30-90 days. You should apply when you're ready to start house hunting seriously and are ready to make an offer, but it's also essential to read the fine print and know how long your preapproval letter is valid.

A preapproval does not ensure that you will get a loan; the mortgage can still be turned down. It's important to avoid making any financial decisions after preapproval that can pose a greater risk for you. Avoid applying for new credit, making huge expenditures, or skipping loan and credit card payments while your mortgage is being preapproved.

Why is Preapproval Important in the Homebuying Process?

Pre-approval simply provides you with important details regarding the  home buying process and helps you determine the maximum amount you might be eligible to borrow. Why is this helpful to you? Let’s understand.

1. You'll Be Aware of How Much You Can Afford To Borrow

Obtaining pre-approval provides you with a clear idea of your overall budget, what you can borrow, and what you can afford. While it's tempting to get carried away with the thrill of discovering the ideal house, it's crucial to fall in love with one that makes sound financial sense. You will receive a conditional approval on the amount you can afford and the price range you must adhere to after speaking with a lender.

2. It Could Accelerate Your Home Buying Process

Acquiring a mortgage pre-approval can speed up the process of purchasing a home. Since you have already been pre-approved, you can proceed with the purchase of the home as soon as you locate it. By doing this, you can ensure a seamless and effective transaction and prevent delays.

3. It Helps Keep Disappointments at Bay

Imagine discovering the ideal house, only to find that you are unable to afford it. Getting a mortgage pre-approval will help you avoid this unpleasant and disappointing experience. Being pre-approved helps you avoid the disappointment of falling in love with a home that is out of your price range by providing you with a clear idea of how much you can afford to spend.

4. It Helps You Get Ready for the Home-Buying Process

Getting  prequalified mortgage loans can help you in getting ready for the house-buying process. You can budget for extra fees like closing costs, real estate taxes, and homeowner's insurance by understanding how much you can borrow. By doing this, you can make sure that you have enough money saved up for the house-buying process and prevent unforeseen charges.

Frequently Asked Questions on Mortgage Preapproval

If you want to learn more about home loan preapproval, you'll want to read these frequently asked questions.

1. Why must I get a mortgage preapproval?

Having a mortgage preapproval is beneficial to prospective homeowners for several reasons. It facilitates buyers' budget-friendly home search, leading to a more seamless and effective house hunt. It also expedites the majority of the mortgage procedure and increases the appeal of an offer to a seller.

2. For how long is a preapproval valid?

Depending on the lender, an acceptance letter valid for 60 to 90 days will be sent to you if you are preapproved. You will then have to reapply with new documentation and fresh credit pull. Your preapproval limit may also change if there are any significant changes in your financial status.

You do not need permission to view a house. However, it is favorable to obtain mortgage preapproval in the home buying process, to get a heads up about any financial obstacles that might come in your way.

3. What requirements are considered for giving preapproval?

Lenders will want to confirm your employment and income in addition to looking at your credit score. They will also take your debt-to-income ratio (DTI) into account. This is the result of dividing your monthly income by the total amount of debt you have. The percentage representation of this ratio aids lenders in determining if you make a sufficient amount of money to pay off your debts. Depending on the type of loan, different DTIs are required for mortgage approval.

4. Why should I apply to multiple lenders to get a preapproval?

Homebuyers can evaluate interest rates and select the offer with the best terms by submitting applications to multiple lenders. Over the course of the loan, you can save a significant amount of money by shopping around for a mortgage that best suits your needs.

5. Does getting multiple preapprovals lower your credit rating?

Every time you apply for a loan, a lender performs a "hard pull" on your credit report. Usually, this results in a few point deduction to your score. But according to the Fair Isaac Corporation, if you complete all of your house loan queries within 30 days, your credit score won't usually suffer.

6. Can I be denied for a mortgage after being preapproved?

After preapproval, a buyer's mortgage may still be rejected. This could happen as a result of a problem with the appraisal or modifications to the guidelines established by the lender.

However, the majority of the time, a buyer's negative financial situation is the reason behind the denial.

7. Can someone with poor credit get approved for a mortgage?

The type of mortgage you're hoping to get will determine the credit score required to purchase a home. For instance, FHA loans only need a score of 580, although conventional loans often require a score of 620. If your score is lower than required, you might not be accepted.

However, even with poor credit, you can still get approved. A larger down payment or a lower debt-to-income ratio can improve your chances of being approved for a mortgage. You can also make homeownership possible by switching to an FHA loan or by waiting to apply until after you have repaired your credit.

8. When should I apply for preapproval?

Soon after you're set to start looking for a house, you should be authorized for a mortgage. What's more, as soon as you're in a place to purchase a home, you should get your mortgage approved. Remember, the better your financial circumstances, the higher your chances of being accepted.

9. What’s the best way to get a mortgage preapproval?

Check your credit score and report prior to contacting a lender to get a mortgage preapproval. You might be able to get a better mortgage rate if your credit score is higher. Your credit score may be less than it should be due to errors in your credit report.

10. Is a credit check necessary for mortgage preapproval?

Yes, it's indispensable. Some lenders may allow you to qualify for a mortgage without doing a thorough credit check at the initial stage; in that case, they could only be concerned with your ability to repay the loan and whether you have any credit red flags. A credit check will be necessary to obtain full-scale pre-approval, though.

11. Is it a hard pull to get pre-approved for a mortgage?

Yes, getting pre-approved for a mortgage involves a hard pull on your credit report, which can temporarily lower your credit score by a few points.

The Bottom Line

Getting preapproved is an excellent place to start when buying a house. After your financial data is confirmed, you'll know exactly how much house you can afford.

But, keep in mind that receiving a preapproval for a mortgage does not ensure that you will get a loan. Before your loan closes, pre-approval letters are only granted if your job and financial information is accurate and consistent.

Learn from our experience.

Each week our editors add new content to our blog, you can find useful topics

USDA Loan vs. FHA Loan: Which Is the Better Option For You?
USDA Loan vs. FHA Loan: Which Is the Better Option For You?

Unlike conventional mortgages, mortgage loans from the Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA) are ...

Home Affordability: How to Overcome Financial Hurdles
Home Affordability: How to Overcome Financial Hurdles

These days, a lot of first-time homebuyers are concerned about home affordability. For many Americans, resolving financial and credit-related barriers ...

Which Credit Score Do Mortgage Lenders Use To Review Mortgage Applications?
Which Credit Score Do Mortgage Lenders Use To Review Mortgage Applications?

Your credit history is displayed in your credit score, which is a three-digit figure. Lenders take this into account when ...