An initial step in the home-buying journey is sealed through mortgage pre-approval. In this post, we will discuss the mortgage pre-approval process, its significance, and the eligibility criteria. Read further to lean the difference between pre-approval and a pre-qualification.
What is Mortgage pre-approval?
Mortgage pre-approval is a process of evaluation by a lender that assesses your financial status and creditworthiness to determine the amount they can lend you to buy a home, especially for loans for first-term homebuyers. It has more detailed tests than pre-qualification. On the one hand, it is not a guarantee for a loan to be granted.
Differences between pre-approval and pre-qualification
Pre-qualification is the first step in the process where you offer your lending institution some financial data, which helps them come up with a tentative amount that you can borrow. Still, it does not mean you will definitely get a loan.
Different from pre-approval, in-depth underwriting is carried out to find and document your financial details, including documents like income statements and credit records. That’s extra evidence to sellers that you have the financial capacity to pay for the home.
Why is the mortgage pre-approval process important?
1) It helps you to work within your budget: This will help you limit your home search to homes that you can comfortably afford.
2) Competitive advantage: Pre-approved buyers will enjoy the advantage of having their offers treated seriously, as it shows that you can secure financing.
3) Faster closing process: With all of the paperwork provided, the approval time and closing becomes shorter, too.
4) Negotiation power: This may mean that you have more leverage when negotiating terms, which in turn may help you get a more favorable deal. So, how do you qualify for a mortgage pre-approval?
Mortgage Pre-approval Qualification Criteria
i. Income verification: The lenders are going to ask you for documentation showing your stable income, which is typically done through pay stubs, tax returns, and/or W-2 forms.
ii. Employment history: Job history in a steady line of work extensively suggests credibility and trustworthiness to lending firms.
iii. Credit history: Lenders will look at your credit report and score to ascertain your creditworthiness.
iv. Debt-to-income ratio: Almost, lenders will look at your ratio of debt payments to income to find out if you will be able to pay the monthly mortgage installments.
v. Assets: Documentation of assets like savings, investments, and retirement funds is required to prove that you are capable of covering the down payment as well as closing costs.
vi. Down payment: Even though pre-approval does not necessarily demand a down payment, having one can help you out with your application greatly.
vii. Documentation: You will be required to provide different documents, such as identification papers, bank statements, and possibly additional financial documents if necessary.
Mortgage Pre-approval Process: The Steps To Take
1. Gather your financial documents
Acquire documents like pay stubs, W-2 forms, tax returns, bank statements, and investment statements to confirm your income, assets, and debts.
2. Research lenders
Check out various lenders with pre-approval options. You may look into banks, credit unions, and online mortgage lenders. For example, you might try checking out traditional banks like Bank of America, Schwab Bank, or online lenders such as Rocket Mortgage and Truist.
3. Submit an application
Fill out the lender’s pre-approval application form. Make sure you input the correct information such as, income, employment details, assets, and debts. Personal information could also be included. Some lenders may let you apply online, and others may demand a personal visit.
4. Authorization for a credit check
Get consent from the lender to see your credit report and score. This plays an important role in making a decision about borrowing money. Each lender has a specific credit score. However, you will need at least 620 if you are going for conventional loans and a score of 580 for FHA loans.
5. Wait for approval
The lender will go through your application and documents to check if you qualify for the pre-approval or not. This letter normally has a validity period that could be 60 or 90 days.
6. Receive a pre-approval letter
Once you have submitted a loan application and you are able to meet the lender’s pre-approval requirements, you will receive a pre-approval letter that indicates you have qualified for a certain loan amount, pending final underwriting approval.
When pre-approved, the lender will provide a pre-approval letter that you can use to show real estate agents and sellers that you are financially ready to buy a home.
Tips for Successful Mortgage Pre-approval Process
a) Arrange your financial documents
It is important to make sure you are in possession of all the financial documents that you may need. For instance, you should have copies of pay stubs, tax returns, bank statements, and investment account statements that you can use to process the application for pre-approval faster.
b) Get a folder
Make a folder or digital file containing any document needed for filling out the pre-approval application form so that you can locate all of them as you complete the application.
c) Review your credit report
Review your credit report to check if there are errors or inconsistencies that may harm your credit score and deal with them before filing your application for pre-approval.
d) Get your free credit report
Use the annualcreditreport.com to thoroughly check for errors like misleading account information or unauthorized inquiries.
e) Improve your credit score
Try to improve and maintain your credit score. You can cut down outstanding debts, lower credit card debts. Doing this will tilt the odds in your favor, and you will qualify for better loan terms.
Focus on paying off the above-average credit card debt first instead of opening new lines of credit. Then apply for pre-approval. In addition, avoid making large purchases during this period.
Read also:Â Mortgage Points vs. Interest Rate: What You Need To Know
Conclusion
The home loan pre-approval is a significant part of the homebuying process and comes with several advantages and benefits.
Pre-approval allows you to know exactly what you are able to afford. This way, you can shop with confidence for homes within your budget.
Therefore, the mortgage pre-approval process will boost your creditworthiness as a buyer, and sellers will be more willing to accept your bid. Consequently, you will have greater opportunities for offers to be accepted
We urge you to be proactive and secure preapproval early on in your home purchasing journey. Get hold of all your financial papers, study your credit report to know your status, and work on improving your credit score for a better pre-approval application.
There is no need to think twice, as you can always connect with lenders and begin the pre-approval process right away. Do well to compare rates before you make your choice.
