قالب وردپرس درنا توس
Home / Tips and Tricks / Mortgage Approval: Everything You Need to Know to Get Prequalified

Mortgage Approval: Everything You Need to Know to Get Prequalified


Your journey towards buying a home begins with receiving a letter of approval for a loan.

David Paul Morris / Getty Images

Buying a house – especially for the first time – is a complicated process that consists of many steps, each important in its own right. One of the first and most important steps in the journey is to pre-approve your mortgage. It is proof that you have prepared the financing you need to close the house. Without a prior letter of approval, most sellers will not take your offer seriously.

While some lenders have tightened their standards because of the pandemicCompared to some other parts of buying a home, getting a mortgage up front is usually not that difficult or complicated. Let’s see how it works.

What does it mean to be pre-approved for a mortgage?

A pre-approval for a mortgage is a letter from a lender stating that you have been provisionally approved for a loan. It typically includes a maximum loan amount, an interest rate, and other relevant terms or information.

Significantly, getting pre-approval on a mortgage does not guarantee that you will actually get a loan – or the specific rate and terms on offer. Rather, it is a statement from the lender stating his intention to borrow and the terms and conditions associated with it, assuming that the information you have provided about your income, work and financial situation is correct. It also assumes that there will be no significant changes in your financial situation or credit score – for example, losing your job or taking out another loan – as these could affect the terms and conditions or even disqualify you.

“Many housing markets across the country are struggling with inventory, which is driving demand significantly,” said Jefferson Watters, a lender for AmeriSave Mortgage Corporation. “A pre-approval shows a commitment from the buyer and tells sellers that the buyer is fully qualified to purchase their home. The seller will almost always choose the pre-approved offer.”

Pre-Approval vs Pre-Qualification: What’s the Difference?

When looking for a mortgage, another term you may come across is ‘prequalification’. While pre-approval and prequalification are often used interchangeably, the process and terminology varies by lender.

In some cases, prequalification is based on your answers to a few initial questions and a soft credit check (where a lender checks your score but doesn’t produce a full report that could affect your credit). It usually doesn’t include details about the loan amount, interest rate, or terms. As such, it is less authoritative than pre-approval, but it is a good way to get an initial idea of ​​whether you are in sufficient financial condition to qualify for a mortgage.

“A genuine pre-approval will verify the assets, income and ability to repay the loan,” Watters said. “Some lenders will provide a preliminary prequalification letter, but this will only show an eligible borrower based on the information they submitted in their application.”

When you’re ready to bid on a home, you’ll want an official statement from a lender – or, better yet, multiple lenders – that you can get the financing and terms you need to close . deal. Whatever term your lender uses, make sure you have it before placing a bid.

When do you need to be pre-approved?

When you request a pre-approval, your lender will first collect some basic financial information from you and request your credit report. In most cases that means a difficult research on your credit, which could affect your creditworthiness. That’s why you shouldn’t get pre-approval before seriously looking to buy a home. This will protect you from unnecessary impact on your credit score and ensure that your pre-approval is valid when you are ready to make an offer; a letter of approval for a home loan is usually only valid for 30 to 60 days.

Having multiple letters of approval from a few different lenders will only make your hand stronger. And if you get multiple inquiries for the same type of credit within a short period of time, the credit bureaus will usually treat them as one study and avoid getting your credit score too high.

How to get pre-approved for a mortgage

The process of obtaining pre-approval for a mortgage is quite simple, and the better prepared you are, the smoother and faster it will go.

Step 1: Review your financial situation

Before requesting pre-approval, it is a good idea to assess your current financial situation.

Pull up your credit report: Under normal circumstances, you are entitled to one free report from any agency every 12 months, however you can now get a free credit report every week through April 2021(Note that getting your own report will not affect your score.) Review your credit history to make sure everything is correct; you can Contacting lenders and the credit bureaus to make corrections if necessary

Calculate your debt-to-income ratio: A key factor in getting prequalified for a mortgage, your DTI ratio represents your total monthly debt payments as a percentage of your monthly income. Most lenders don’t offer a loan that puts your DTI above 43%. So if you currently have an auto payment of $ 300, monthly minimum credit card payments of $ 65, and a monthly income of $ 5,000, your lender will only approve you for a mortgage with a monthly payment of $ 1,785.

Step 2: Submit your documents

For an official prequalification, lenders won’t just take your word for it when it comes to your income and liabilities. You have to show evidence. Each lender may have different requirements, but here are some documents and information that you usually need to submit for yourself and someone else in the loan application:

  • Your employment history (and contacts for verification)
  • Payment slips from the past 30 days
  • Bank statements for the past two months
  • W-2s and possibly tax returns from the past two years
  • Contact information and statements from insurance agents
  • Information about outstanding debts (your lender can usually just get this from your credit report)
  • Business financial statements and tax returns (if you are self-employed)
  • Expected down payment (this will affect your loan terms, interest and possible private mortgage insurance)

Not all lenders require all of this information for pre-approval, but you must provide it at some point before your loan becomes official. And if you have everything prepared, the process can be accelerated.

Step 3: Review of lenders and documentation

Next, your lender will review all of your documents, request your credit report, and attempt to verify all of your information. This may include calling current and former employers to verify your employment and wages, confirm outstanding amounts borrowed, and investigate unusual transactions on your bank statements. Normally, this process does not take more than a few days.

Step 4: Get your pre-approval letter (or rejection letter)

Once your lender completes the assessment, you will receive the verdict. If there are no serious issues, you will receive a pre-approval letter detailing your maximum loan amount, estimated interest rate, loan type, and terms. You want to give this letter to your broker so they can submit it with each offer.

What to do if you are denied pre-approval

There is always a chance that you will not be pre-approved for a mortgage. But don’t be discouraged. One rejection doesn’t mean you can never get a mortgage. Particularly during the pandemic, some lenders tightened their standards for credit scores, down payments, and more. But that won’t last forever.

“We see these limitations start to ease as the market begins to recover and the economy becomes more accustomed to a fully virtual way of life,” Watters said.

If you do get rejected, try applying with a different lender. If a lender has denied you a credit score of 690, you can probably find a lender who will still qualify for a conventional loan of 620 and above.

If you sign up with a few lenders and still can’t get pre-approved, don’t lose heart. Under the Equal Credit Opportunity Act (PDF), your lender must tell you why your application was denied. It could have been your credit, or it could be that you haven’t been in your current job long enough. Whatever the reason, you now know what to work on so you can get pre-approved in the future.

What are the pitfalls?

Getting approval is usually pretty easy, but there are options to set things aside. Here are a few things to avoid.

Apply if you are not really ready yet: If you already know your credit isn’t great or you’re in too much debt, don’t waste time getting pre-approval (and hurt your credit even more in the process). Make a plan to rebuild your credit to increase your chances within six to 12 months.

Assuming your terms are finalAgain, getting pre-approval for a mortgage is not the same as officially underwriting and insuring your loan. Your conditions may change. For example, interest rates fluctuate, and unless your lender says your interest rate is locked for 30 or 60 days, your final interest rate may vary, albeit slightly. If the information you provided was not correct, that could also change your final terms.

Making new debts between pre-approval and acceptance: Besides, your own financial choices can change your loan terms or derail the loan altogether. Once you are pre-approved, it is time to wait for major financial changes. That means no changing jobs, no new credit cards, no major purchases such as a new car.

Waiting too long after prior approval: The pre-approval of your loan is usually only valid for 30 to 60 days. Once you have a letter, it’s time to go house hunting and get ready to make an offer. Otherwise, you may have to restart the process.

Source link