Buying a home can be a stressful process, whether you’re a first-time buyer or have been buying real estate for decades. Not only is there the emotional anxiety over finding a home that you like and is in good condition, but there’s also the pressure to make sure you get approved for a mortgage.
Plus, even if you find the home of your dreams, you still have to put in an offer and hope that it’s accepted with no competition from other buyers.
Luckily, there’s a way to not only stand out from other home buyers but also to expedite your mortgage approval process. By getting preapproved for a mortgage before you even put in an offer on a home, you can significantly increase your chances of having your offer selected.
What is a mortgage preapproval?
A mortgage preapproval refers to a letter from your lender indicating that you meet the standards for a mortgage loan within a certain price range.
The lender has thoroughly reviewed your credit history, income, and other financial indicators and put them through the automated underwriting system. Preapprovals are typically valid between 60 and 90 days.
Why should you get preapproved for a mortgage?
There are a couple of benefits to getting preapproved in advance of viewing houses. One of the most important factors is that it strengthens your offer when bidding on a home that you love.
Many deals fall through because of financing issues even after the seller accepts an offer. If you have a preapproval letter to submit as well, the seller knows that the deal is more likely to close by accepting your offer than someone else’s.
Also, real estate agents typically want to see that you’ve been preapproved before they show you houses. They don’t want to waste their time showing clients houses if they cannot buy a home.
Mortgage Preapproval Letter
Getting a mortgage preapproval letter also gives you a chance to see how large of a home loan you’ll be approved for, helping to narrow down your home search to the suitable price range.
You’ll also find out what types of home loans you qualify for, whether it be a conventional, FHA, VA, or other type of mortgage. Some of these loans have certain restrictions on the type of property you can purchase and what condition it must be in. Some also require a certain down payment percentage.
Private Mortgage Insurance
If your down payment is less than 20%, you’ll likely have to pay private mortgage insurance (PMI), which is also based on the loan amount. Getting preapproved helps you financially prepare for the full cost of your new home and your monthly mortgage payment.
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Once you determine your target loan amount, you’ll know what your monthly principal, interest, and mortgage payments will look like. When you know that, you can then look at individual properties to determine how much property tax and even homeowner’s insurance you’ll need to tack on to each month’s payment.
You need to consider all of your fees before finalizing your maximum home price. Otherwise, you could be unpleasantly surprised when you get your first mortgage bill.
What should you do before preapproval?
Before you talk to a lender about getting preapproved for a mortgage, the best thing to do is to check both your credit report and credit score.
Get Your Free Credit Report
You can access your credit reports from each of the three credit bureaus for free once every twelve months. So get started a few months before you’ll be house hunting to give yourself time to address any issues.
Dispute Negative Inaccuracies
You might have outdated information lingering on your credit report or even incorrect items. The dispute process can take some time. You want to make sure your credit history is as strong as possible. That way, you can get approved and get the best mortgage rates possible when the time comes.
Check Your Credit Score
There are a couple of free websites like Credit Karma that give you access to your credit score. It might not be the same credit score your lender will use, but it still lets you know what ballpark you’re in. If your credit score is lower than you’d like to see, you have time to make some quick fixes.
For example, you can get a higher credit card limit to decrease your credit utilization ratio or pay down extra debt to lower your debt-to-income ratio. A little planning in advance can help strengthen your chances for preapproval before you even contact a lender.
How do I get preapproved for a mortgage?
When you’re ready to start the mortgage preapproval process, the loan officer will ask you for several pieces of information. You will need to provide income tax returns from the past two years, pay stubs to verify your employment and gross monthly income, and bank statements.
You’ll also have to provide your social security number and sign a form giving the lender permission to perform a hard inquiry on your credit report.
At that time, the lender will also perform a credit check and review your credit score to use in the evaluation process. Because underwriting systems are now automated, you can get preapproved in a matter of minutes.
When the underwriting process is completed, you’ll either receive one of four responses.
Here’s what they are and what they mean:
- Approved: your initial mortgage preapproval has gone through with no conditions.
- Approved with conditions: you must complete additional steps before getting approved (for example, providing extra income verification to the lender.)
- Suspended: you must answer additional questions before the underwriter determines whether you’re approved.
- Declined: your application did not get approved.
Many mortgage lenders state that it’s actually quite rare to be approved with no conditions on your first attempt at getting a mortgage preapproval. So, don’t be disheartened if this happens to you—you’re in good company!
Even a suspended application isn’t the end of the road. And if the lender declines your mortgage preapproval, make sure to ask them why so that you can take targeted steps to improve the weak areas in your application.
What’s the difference between prequalified and preapproved?
When you first contact a lender about qualifying for a mortgage, you’ll probably talk about your basic financial picture to help you determine how much of a loan you’re likely to get approved for.
This is referred to as prequalification for a home loan. The mortgage lender doesn’t access your credit report or request financial documentation. Instead, they give you an idea of loans you’d qualify for based on the information you provide.
If you give false information, your mortgage application will definitely fall apart in the underwriting process, so it’s important to be honest and as accurate as possible. Otherwise, it’s a waste of your time. Getting prequalified is a smart move to inform yourself of your mortgage options, but it’s not strong enough to submit with an offer on a house.
On the other hand, a mortgage preapproval proves to sellers that you’ve already been through the preliminary underwriting process, and your financing is likely to go through all the way.
In this instance, you submit all necessary financial documentation to your lender. Not only does it strengthen your offer when you find a home you like, but it also speeds up the next steps in the mortgage process so that you can close more quickly.
Choosing a Mortgage Lender
Getting a prequalification before a preapproval may seem like an unnecessary step, but it’s a great way to interview the lender as much as they’re interviewing you.
At the end of the day, lenders compete for your business, so don’t just choose the first one who gives you a prequalification or preapproval. There are several factors to consider before you make this critical decision. You should talk with multiple lenders and compare interest rates and loan options to find the best one for your financial situation.
Comparing Interest Rates
Start with an interest rate comparison. You should be able to get quotes based on your basic financial information without the lender performing a hard pull on your credit report.
Also, consider how much money the lender says you can afford. They don’t know how much your other bills are or how much you’re comfortable spending.
If they try to pressure you into a loan amount that seems like it would be too expensive based on the monthly payments, they may not have your best interests at heart. A good lender wants to make sure you can afford your payments every month and is transparent about costs beyond your principal and interest.
Mortgage Rate Lock Float Down
You can also ask lenders what kind of perks they offer. For example, some give their clients one free float down before closing. This means if interest rates have dropped since you locked in your rate, you can get that lower rate without having to pay any additional fees or points.
Others offer discounts on closing costs to clients in public service professions, such as teachers, police officers, and firefighters. Even if a particular lender doesn’t offer any of these services, you can reference another one that does to negotiate your own special deal.
Mortgage Preapproval Checklist
- Check your credit report and credit score.
- Find a trustworthy lender.
- Get prequalified to find out what type of loans you’re eligible for.
- Gather financial documentation, such as pay stubs, bank statements, W-2s, and income tax returns from the last two years.
- Apply for a preapproval letter to seriously begin your home search.