Pre-approval for a mortgage is, no doubt, an important step in the home-buying process. It indicates to the seller that you are serious about the house you are interested in and can afford it. In this article, we will list out the crucial documents for mortgage pre-approval, and subsequently, we will explain each in detail.
To be pre-approved, you will have to bring a bunch of documents, which shows a lender that you have sufficient financial capacity to take up a mortgage.
What is Mortgage Pre-approval?
Mortgage pre-approval is a process in which a lender accesses a borrower’s financial status and creditworthiness to establish the maximum loan amount they can afford.
This process is done by submitting an application, attaching financial documents (for example, income statements, tax returns, and asset information), and confirming the credit check.
Following the review, the lender issues a pre-approval letter that indicates the approved loan amount and interest rate. Such a letter is usually valid for 60 or 90 days at most.
Documents Needed For Mortgage Pre-approval
Financial institutions will usually demand different documents to evaluate your financial condition and decide how much they are willing to lend you. Here’s a list of common documents needed for mortgage pre-approval:
- W-2 Forms
- Pay Stubs
- Tax Returns (for Self-Employed Individuals)
- Bank Statements
- Retirement Account Statements
- Employment Letter
- Means of Identification
- Social Security Number
- Credit Report Authorization
1. W-2 Forms
W-2 forms are important records giving you a summary of your income earnings and the taxes withheld from your employer for the past two years.
Lenders use income verification and DTI (debt-to-income ratio) calculations to check your debt strength and mortgage eligibility.
2. Pay Stubs
Your recent pay stubs for the past 1-2 months show detailed information regarding your gross earnings, taxes, and deductions.
The lender will use the information in these documents to determine your current employment status, your income consistency, and your ability to pay off the loan.
3. Tax Returns (for Self-Employed Individuals)
If you are self-employed, a W-2 form is a different kind of document. In contrast, lenders would prefer to review your past two years’ tax returns, including schedules and profit and loss statements.
Tax returns serve as one of the basis that lenders use to check whether you have enough income from various sources, and they also prove the credit level through the deducted part.
4. Bank Statements
Your recent bank statements showing all your accounts, e.g., checking, savings, and investment, are necessary for your liquidity and financial strength.
Lenders review this paperwork to make sure that you have enough money for the down payment, closing costs, and reserves after the purchase.
5. Retirement Account Statements
Presenting an account of your retirement accounts, including 401(k), IRA, or pension statements, is another strong point of your financial profile.
These assets may not be related to a down payment, but they make a long-term financial picture solid and provide backup plans.
6. Employment Letter (For Verification)
Giving correct contact information for your current employer allows lenders to check your employment information and income directly.
Certain credit providers may request that you fill out a verification of employment (VOE) form that allows them to contact your employer for verification purposes.
This form is completed by writing down information regarding your job title, status of employment, and main terms of employment.
7. Means of Identification
A valid driver’s license or state-issued ID can be some document used to identify the applicant in a loan application. Further information is usually needed.
Lenders require this document to verify your identity and that you comply with Know Your Customer (KYC) laws and regulations.
8. Social Security Number
Your Social Security number (SSN) is a very essential kind of data that is used to check your credit report and recognize your identity. Your SSN needs to be input correctly to get the pre-approval process without delay or discrepancies.
9. Credit Report Authorization
Lenders may ask you for your consent to check your credit report from one or more credit bureaus. Your credit report gives a complete overview of your credit history, including credit accounts, credit utilization, outstanding debts, and credit inquiries made.
Besides a credit report, lenders can ask for the amount of any existing debts that you are paying at the moment, such as student education loans, auto loans, or credit card balances.
How long does pre-approval for a mortgage take?
The pre-approval for a mortgage loan usually takes 7–10 business days. However the processing time may differ due to multiple factors: the lenders’ workload, the complexity of your situation, etc.
In certain circumstances, you could get the pre-approval in a shorter timeframe, especially if your documents are ready and the lender’s processes are efficient.
Mortgage pre-approval cost
The pre-approval for a loan rate varies from one lender to the next, and it is determined by each lender’s policy. In many cases, there is the benefit of no monetary cost for an approval on a pre-approval.
On the other hand, several lenders might charge an application fee and an extra fee for pulling your credit report, which is part of the pre-approval procedure.
Lender fees may range from $50 to $500 and a few more, though they are included in the closing costs if you decide to apply for a mortgage.
What happens after pre-approval?
Now having the pre-approval is great since you don’t worry about not having money to buy a house because your finances have already been set up.
When you select your property, you will be given an application form that will be filled out and accepted, and from here, you proceed to the next stage of the mortgage application process.
Read also:Â How To Qualify For Mortgage Interest Deduction For 2024
Conclusion
Obtaining the mortgage pre-approval documents is an integral part of the home-buying process that strongly shows you as a serious buyer to the lenders.
The function of these documents is to help with the process of pre-approval and to demonstrate that you are a serious buyer with a real intention of buying a new house.
Don’t forget to speak with your lender or mortgage advisor to confirm all needed documents before pre-approval so that the process will be more straightforward.
