How to get pre-approved for a mortgage in 6 easy steps
Getting pre-approved for a mortgage is an important first step in buying a home that many homebuyers overlook.
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A mortgage loan pre-approval from a mortgage lender lets you, the home buyer, know how much of a mortgage loan you would likely qualify for and the interest rate. Home buyers who have a mortgage pre-approval may have an easier time purchasing, because home sellers will take offers from pre-approved buyers more seriously than offers from buyers who are not pre-approved.
Getting pre-approved for a mortgage is a straightforward process, and all mortgage lenders offer pre-approval to qualified individuals.
Mortgage pre-approvals are valid for a specific amount of time, typically 30 to 90 days. During this time, you can choose to formally apply for the mortgage, or not.
Pre-approvals are not binding loan agreements. After you have made an offer on a house and your offer is accepted by the seller, you will need to complete a formal mortgage application with your lender of choice.
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Read on to learn more about mortgage pre-approval.
What is a mortgage pre-approval?
A mortgage pre-approval is an estimate of how much of a mortgage lender would be willing to lend a homebuyer (the borrower). A pre-approval provides a fairly accurate picture of a homebuyer’s purchasing power.
To get a pre-approval, the borrower must provide the lender with several documents, including proof of income, proof of employment, assets, debts, and other information that the lender will use to determine if the borrower is creditworthy. The lender will also look at the borrower’s credit score.
If you are pre-approved, the lender will give you a pre-approval letter that states how much of a loan you likely qualify for, the interest rate, the length of the loan, the type of loan, and even the subject property address.
You may get pre-approved by more than one lender, so you can see what interest rate, loan amount, and other terms you qualify for. A pre-approval is not a binding agreement between a borrower and a lender.
When you’re ready to shop for the home, it’s a good idea to show the pre-approval letter to your real estate agent. This will help you in your home search. Home sellers are more inclined to negotiate with a pre-approved buyer and take the offer more seriously.
If you are not able to get pre-approved due to bad credit or a low credit score, you may need to follow these tips for building your credit score
Pre-approval vs. pre-qualification: What's the difference?
As mentioned, getting pre-approved for a mortgage requires that you to provide the lender with documentation of your income and debt. The lender will do a “hard pull” of your credit score and look at your credit history and other financial documents to determine your ability to repay a mortgage. Mortgage loan pre-approval usually takes 3 to 10 days because the lender must verify the information you provided.
A mortgage pre-qualification is a rough estimate of how much of a loan a homebuyer may qualify for, and is not as detailed of a process as a pre-approval. Typically, no documentation is required and you can simply state your income and debt and your credit score. The lender may do a “soft pull” of your credit score. Most lenders can provide a pre-qualification within a few minutes or hours.
The pre-approval process for a mortgage includes providing these documents to the lender:
- Proof of income. This includes paystubs, W-2s, (1099s, if you are self-employed), and tax returns. Alimony is also considered income.
- Proof of assets. You will be asked to provide recent bank statements for checking and savings accounts, and some lenders will want to see your investment and retirement account statements.
- Credit score/credit history. All lenders want to know if a borrower is credit-worthy. Credit scoring is a system lenders use to help determine whether to give someone credit or a loan. The most widely used credit scores are FICO scores, which range from 350 (high risk) and 850 (low risk). The higher your credit score, the easier it will be to get pre-approved, and you will likely be approved for a lower interest rate.
- Employment verification. If you have an employer, your paystubs will show that you receive income. If you are self-employed, you will need to provide profit-and-loss statements and both personal and business tax returns.
- Driver license. A government-issued photo ID will be required for a pre-approval and when you complete a formal loan application.
- Social security number. The lender will use this to verify your identity, credit score, and other information.
Debt-to-income ratio (DTI).
Other factors affecting a pre-approval
This ratio tells the lender if you can afford to take on the new debt of a mortgage loan. If your current debt is very high and your income is not sufficient to cover new debt, you could be turned down for a mortgage.
To calculate your DTI, add all your monthly expenses (debt payments) and divide that number by your gross monthly income (before taxes). Most lenders look for a DTI ratio of less than 36%.
If you’re planning on purchasing a home using a mortgage, then it’s smart to avoid making debt-based purchases that would increase your DTI, such as buying a car with a loan.
Loan-to-value ratio (LTV).
The LTV on a mortgage loan compares the amount of the loan to the value of the property. LTV = (the amount of the loan ÷ Appraised value of the property) × 100. Typically, lenders will approve a mortgage with an LTV from 55% to 95%, depending on the type of mortgage program, the borrower’s credit score, and the down payment amount. The higher the LTV, the more risk there is for the lender.
Get pre-approved for a mortgage in 6 Easy Steps
Here are the six basic steps for getting pre-approved for a mortgage:
- Check your credit score. According to the credit bureau Experian, a credit score of 620 or higher is typically needed for a conventional mortgage. Some government mortgage programs require a credit score of at least 580. Get your free Annual Credit Report.
- Calculate your DTI. To calculate your DTI ratio, add all your monthly expenses (debt payments) and divide that number by your gross monthly income (before taxes). Lenders prefer a DTI under 36%.
- Gather the necessary documentation. This includes your driver license, social security card/number, pay stubs, bank statements for savings and checking accounts, investment account statements, W-2s, 1099s, tax returns, and debt payment statements for other loans (such as student loans and auto loans). If you are self-employed, you will need to show a year-to-date profit and loss statement and business tax returns. These documents will be used for the formal mortgage application as well.
- Shop different mortgage lenders. Mortgage pre-approval is available from many types of lenders, including credit unions, banks, and online lenders. However, it’s always smart to start the process by speaking with the financial institution where you currently have an account. You may qualify for special interest rate promotions or fee discounts.
- Complete and submit the application. You may submit pre-approval applications with several lenders to see which one can provide you with the best interest rate and terms for your unique needs.
- Pre-approval letter. If approved, the lender will send you a pre-approval letter. All pre-approvals are good for a specific amount of time, such as 30, 60, or 90 days. When the pre-approval expires, the interest rate and other terms of the approval will expire. This is because interest rates fluctuate and could affect the amount of the loan you qualify for.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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