How To Ensure You’ll Get Pre-Approved For A Mortgage
So you’ve been fantasizing about a dream home in your dream neighborhood for what seems like forever, and now a ‘For Sale’ sign on a house that seems to check all the boxes has gone up, and you’re ready to make a move. Step number one when it comes to crossing the threshold to home ownership: get a mortgage pre-approval.
A formal letter from a lender, a pre-approval verifies the amount of money you can borrow and at what interest rate. Think of it as a vote of confidence that you can manage a mortgage; sellers and real estate agents look at it as a testament to how serious you are about buying. A pre-approval carries more weight than a pre-qualification, which is basically an estimate based on your credit score and your finances.
Additional Reasons To Get Pre-Approved
Crunching The Numbers
With a pre-approval, you’ll find out from the lender how much money they’re planning to give you as well as the interest rate. With that information in hand, you can crunch the numbers to determine if you can realistically afford the home you’re looking to purchase. When calculating your pre-approval, lenders will look at your debt-to-income ratio by adding up all your monthly debt payments and dividing them by your gross monthly income; most lenders won’t offer you a loan if your new ratio will surpass 43%.
Alerting You To Problem Areas
Because lenders want to work with buyers they feel can successfully manage mortgage payments, they’ll let you know up-front about potential roadblocks so that you can resolve the problem. A pre-approval can help you flag credit report errors, discover a need to lighten your debt load, or build your credit score.
Using Leverage To Negotiate
A mortgage pre-approval indicates to real estate agents and sellers that you can afford to buy a home and that you’re a trusted buyer. As a result, you’ll have more negotiating power than buyers without a pre-approval and who might be offering overly-optimistic bids that they can’t realize.
The pre-approval process involves verification of income, assets, employment, credit history, and identity. You can provide the necessary information by completing a mortgage application, also called a 1003 form.
The following documents provide the information lenders will be looking for:
- W-2 wage statements from the past two years
- Pay stubs from the past 30 days
- Proof of income obtained outside of your regular employment, such as rental property or a side hustle
- Proof of income from self-employment
- Bank statements or proof-of-funds
- Gift letters that prove financial help from family members is not a loan
- Social Security number
- Signed authorization to pull your credit report (qualifies as a “hard inquiry,” which could lower your credit score by a few points temporarily)
Once all of the information has been collected by the lender, your application will be reviewed by an underwriter who then decides if your application is worth the financial risk to the lender.
Underwriter determinations fall into four categories: approved; approved with conditions such as providing additional documentation, like pay stubs or proof of insurance; suspended because essential documents are missing from your application; denied, the reasons for which your lender can explain, such as a high debt-to-income ratio or a low credit score.
Purchasing a home is not a financial commitment to be taken lightly, so consider shopping around for a mortgage lender that best suits your needs. And you needn’t worry about your credit score being dinged for every hard inquiry submitted by a lender: credit bureaus expect potential homebuyers to shop around for the best rates, so they will treat all inquiries within a short period as one. The newest FICO scoring model considers all inquiries within a 45-day window as one pull; older versions work off a 14-day span.
With Your Pre-Approval In Hand…
According to a Freddie Mac study, borrowers who get five quotes save an average of $3,000 more than those who get only one, which means you’ll be in a better position to keep money from slipping through your fingers. A pre-approval is good for 30 to 90 days, depending on the lender, so you’ll want to move quickly in order to make a sweet deal on your next home-sweet-home.