Everything a homeowner needs to secure a mortgage loan pre-approval
Getting pre-approved for a mortgage can be a crucial step in the home-buying process. Consult with a lender and acquire a pre-approval letter to discuss loan alternatives and budgeting with the lender. This step can help you clarify your entire house-hunting budget as well as the monthly mortgage payment you can afford.
As a borrower, you should understand what a mortgage pre-approval is (and isn’t), as well as how to improve your chances of acquiring one.
Important Points to Remember
Shop mortgage rates and find the best deal by going through the pre-approval process with a lot of lenders.
Sellers often ask for a mortgage pre-approval letter and, in some cases, proof of funds to show that a buyer is interested in the home.
Filling out a mortgage application and giving your Social Security number to the lender is the first step. This allows the lender to do a credit check on you as the first step.
You’ll also have to supply thorough evidence of your work history, assets and liabilities, income tax returns, and other relevant information. Buyers who are self-employed may be required to produce additional paperwork.
After reviewing your application, a lender will either give you pre-approval, give you pre-approval with conditions, or not give you pre-approval at all.
Pre-approval is a financial “physical exam.”
Before they decide whether or not to pre-approve you for a mortgage, lenders will look at the following things:
Debt-to-income (DTI) ratio
LTV (loan-to-value) ratio
FICO (Financial Institutions Code of Conduct)
Mortage Influencing Factors Pre-Approval
Consider a mortgage pre-approval as a financial physical exam. Lenders will most likely probe every aspect of your financial life in order to verify that you’ll be able to repay your mortgage.
Pre-qualification vs. Pre-approval: What’s the Difference?
You’ve probably heard the terms “pre-qualification” and “pre-approval” used interchangeably, but they’re not the same. A pre-qualification letter gives a mortgage lender a summary of your finances, income, and debts. After that, the mortgage lender provides you with an anticipated loan amount.
A mortgage pre-qualification might serve as an estimate of how much you can afford to spend on a property in this way. The lender, on the other hand, does not pull your credit records or verify your financial data. As a result, pre-qualification is a good beginning point for determining what you can afford, but it has no bearing when it comes to making bids.
A pre-approval, on the other hand, entails completing a mortgage application and supplying your Social Security number so that a lender may run a rigorous credit check on you. When you apply for a mortgage, you will be subjected to a rigorous credit check. Before opting to lend you money, a lender examines your credit record and credit score to analyze your creditworthiness. These checks will appear on your credit report and may have an effect on your credit score.
A soft credit check, on the other hand, occurs when you draw your own credit or when a credit card firm or lender pre-approves you for an offer without your permission. Your credit score is unaffected by soft credit checks.
You’ll also include all of your bank account information, assets, debts, income, job history, previous addresses, and other important factors that a lender will need to verify. The reason for this is that a lender wants to know that you will be able to repay the loan. Lenders also utilize the information you supply to determine your debt-to-income (DTI) ratio and loan-to-value (LTV) ratio, both of which are important considerations in determining your interest rate and loan type.
A pre-approval is far more beneficial than a pre-qualification because of all of this. It indicates the lender has investigated your credit and validated your paperwork in order to authorize a specified loan amount. When you have an appraisal and the loan is applied to a property, you get final loan approval.
When Should You Get Pre-Approval?
Pre-approval letters for mortgages are usually good for 60 to 90 days. Because your finances and credit profile may change, lenders include an expiration date on these letters. To get a new pre-approval, you’ll need to fill out a new mortgage application and give the lender the most up-to-date documents.
If you’re just getting started thinking about purchasing a house and feel you’ll have trouble getting a mortgage, going through the pre-approval procedure can help you detect credit issues—and allow you time to fix them.
Pre-approval six to one year before a serious property hunt will put you in a better position to improve your overall credit rating. Additionally, you’ll have more time to save for a down payment and closing costs.
When you’re ready to make an offer, a seller may need a mortgage pre-approval letter and, in some situations, proof of finances to demonstrate that you’re a serious buyer. Sellers may be more willing to accept bids from people who have been pre-approved for a loan because there aren’t many homes for sale in many hot markets.
How long does it take to get a mortgage pre-approval?
The length of time it takes to receive a response is determined by the lender. Some lenders promise same-day approval, while others say it will take a few days, or even a week. Keep in mind that the terms “pre-qualified” and “pre-approved” may have various meanings among lenders and are sometimes used interchangeably, so the time it takes to get pre-qualified and pre-approved can differ. It’s important to find out if the lender is doing a pre-qualification or a more in-depth pre-approval.
Is it possible to get pre-approval for a mortgage without a credit check?
It’s really unlikely. Some lenders may allow initial qualification without a complete credit check; at that time, they may be interested just in whether you have the financial means to repay a mortgage and no credit red flags. However, obtaining full pre-approval will almost certainly necessitate a credit check.
It’s crucial to understand how long pre-qualification and pre-approval will last. Various lenders give different lengths of time for their letters of pre-qualification or pre-approval to be valid, ranging from 30 to 120 days.
Remember that having your credit history checked several times might have a negative impact on your credit score, so you don’t want to do it frequently. For the same reason, you should wait to apply until you’re ready to start seriously looking for a home. Many lenders and real estate agents can help you figure out an approximate range of what you can afford, so you don’t have to go through the pre-qualification or pre-approval process just to find out that you can’t afford or want anything in your market.
How can I increase the amount of my mortgage pre-approval?
Ascertain that the prospective lender has the proper information, particularly regarding your income and liabilities. You can request a copy of the lender’s credit report, and if you believe it contains inaccuracies, you can contact the appropriate credit bureau. 17. You’ll also need to get in touch with the company that provided the data. You might also look into other lenders who may have different requirements. However, keep in mind that performing several credit checks in a short period of time can harm your credit score.
What Are the Chances of Being Rejected for a Mortgage After Getting Pre-Approved?
If you’ve stuck to your budget, the chances aren’t very great, but it does happen. Remember that a pre-approval letter indicates that you are deemed generally qualified to repay a mortgage, whereas a mortgage approval is unique to a certain purchase. The lender may assume you are overpaying or may have discovered issues that were not discovered during the pre-approval process. In addition, if you are unable to put down a specified proportion of the purchase price as a down payment, often 20%, you may be required to obtain mortgage insurance, which may increase your expenses. In any event, you
are not obligated to stay with the lender who provided you with pre-approval, so you can apply with another lender, which is a smart idea in any event.
How Long Does a Pre-Approval for a Home Loan Last?
The length of validity varies per lender, but it usually ranges from a month to 90 days—and in rare situations, six months. Keep track of the expiration date so you don’t find yourself in a position where you find a dream home that you can afford just to find out that your pre-approval has expired.
The Letter of Pre-approval
If you’ve been pre-approved, you’ll receive a pre-approval letter on official letterhead from your lender. This formal document shows vendors that you’re a serious buyer and that you have the financial resources to follow through on a purchase deal. Most sellers anticipate purchasers to have a pre-approval letter and will be more likely to work with those who can demonstrate that they can get financing.
The purchase price, loan program, interest rate, loan amount, down payment amount, expiration date, and property address are often included in pre-approval letters. The letter is included with your offer, and some sellers may ask to view your bank and asset statements as well.
You are not obligated to borrow from a certain lender if you receive a pre-approval. When you’re ready to make an offer, pick the lender with the best rate and terms for your situation. When you get pre-approved for a mortgage, it doesn’t mean that the lender will give you a loan, even if your financial, job, or income situation changes between pre-approval and underwriting.
Decisions on pre-approval
A lender will normally give you one of three options after examining your mortgage application: pre-approval, outright rejection, or pre-approval with limitations. To satisfy the lender’s terms, you may need to supply additional proof or lower your DTI ratio by paying down some credit accounts in the third scenario. If you are turned down outright, the lender should explain why and offer resources on how to best address the issues.
Discrimination in mortgage lending is against the law. There are actions you can take if you believe you’ve been discriminated against because of your color, religion, sex, marital status, use of public assistance, national origin, disability, or age. A report to the Consumer Financial Protection Bureau (CFPB) or the US Department of Housing and Urban Development is one such process (HUD). 15
Borrowers often need to work on improving their credit score and smoothing out a shaky payment history. When you know what you need to work on, you can devote the time and effort necessary to improving your credit and financial situation so that when you’re ready to start looking for a home, you can get a better mortgage deal. When you look at a lot of lenders, this can save you a lot of money on mortgage prices and make sure that you get better interest rates and terms.
To compare interest rates and locate the best offer, go through the pre-approval procedure with different lenders. Again, you’ll want to compare mortgage lenders within 45 days so that all credit checks are counted as one hard inquiry and your credit score isn’t impacted. If you’re just starting to consider homeownership, the pre-approval procedure can help you improve your credit and finances in preparation for when the time comes.
It’s important to remember that a mortgage pre-approval does not guarantee you a loan. Before your loan closes, pre-approval letters are conditional on your financial and job information being accurate and consistent. If you don’t tell a loan underwriter about important things, like a divorce or an IRS tax lien, and they find out later, your loan may not be approved.