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Pre-mortgage approval: everything you need to know to get pre-qualified


Your home buying journey begins with receiving a loan pre-approval letter.

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

While some lenders have tightened their standards due to the pandemicCompared to some other parts of buying a home, it is usually not that difficult or complicated to get a pre-approval for a home loan. Let’s see how it works.

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

A mortgage pre-approval is a letter from a lender indicating that you have been pre-approved for a loan. It usually contains a maximum loan amount, interest rate and other relevant terms or information.

Significantly, getting a mortgage pre-approved doesn’t guarantee you’ll actually get a loan — or the specific rate and terms offered. Rather, it is a statement from the lender stating that it intends to borrow and what the terms are, assuming that the information you have provided about your income, employment 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 or even disqualify you.

“Many housing markets across the country are struggling with inventory, which is driving demand up significantly,” said Jefferson Watters, lender for AmeriSave Mortgage Corporation. “A pre-approval demonstrates a buyer’s commitment and tells sellers that the buyer is fully qualified to buy their home. In most cases, if a seller has two equal offers on the table, the only difference being that one buyer is upfront approved, seller will almost always choose the pre-approved offer.”

Pre-approval vs. prequalification: 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 vary between lenders.

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 does not prepare a full report that could affect your creditworthiness). It usually does not contain details about the loan amount, interest rate or terms. As such, it’s less authoritative than a pre-approval – but it’s a good way to get an initial idea of ​​whether you’re financially sound enough to qualify for a mortgage.

“A true pre-approval will verify the assets, income and ability to repay the loan,” Watters said. “Some lenders will offer a preliminary prequalification letter, but this only shows a borrower who qualifies based on the information they submitted in their application.”

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

When do you need to be pre-approved?

When you apply for a pre-approval, your lender will first gather some basic financial information from you and prepare your credit report. In most cases, that means a hard research on your creditworthiness, which may affect your credit score. Therefore, you should not request pre-approval until you are serious about buying a home. This will both protect you from unnecessary deterioration in your creditworthiness and ensure that your pre-approval is valid when you are ready to make an offer; a home loan pre-approval letter is usually only valid for 30 to 60 days.

Having multiple pre-approval letters from a few different lenders will only strengthen your hand. And if you get multiple applications for the same type of credit within a short period of time, the credit bureaus will usually treat them as one application and avoid lowering your credit score.

How to get pre-approved for a mortgage?

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

Step 1: Review your financial situation

Before applying for a pre-approval, it’s a good idea to assess your current financial situation.

Pull your credit report: Under normal circumstances, you are entitled to one free report from each agency every 12 months, but you can now get a free credit report every week until April 2021 report. (Note that writing your own report will not affect your score.) Check your credit history to make sure everything is correct; you can contact lenders and the credit bureaus to make corrections if necessary.

Calculate your debt-to-income ratio: An important 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 will not offer a loan that will bring your DTI above 43%. So if you currently have a $300 automatic payment, $65 monthly minimum credit card payments, and $5,000 monthly income, your lender will only approve you for a mortgage with a $1,785 monthly payment.

Step 2: Submit your documents

For an official prequalification, lenders will not take your word for it when it comes to your income and obligations. You must be able 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 for someone else with 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
  • Insurance agent contact details and declarations
  • Information about outstanding debts (your lender can usually just get this from your credit report)
  • Business annual accounts and tax returns (if you are self-employed)
  • Expected down payment (this will affect your loan terms, interest rate, and possible private mortgage insurance)

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

Step 3: Lender Review of Credit 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 involve calling current and previous employers to check your employment and wages, confirm outstanding loan amounts, and investigate unusual transactions on your bank statements. Normally this process takes no more than a few days.

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

Once your lender has completed its 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 will want to give this letter to your broker so that they can submit it with any bid.

What to do if you have been rejected for a 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. Especially during the pandemic, some lenders have tightened their standards on credit scores, down payments and more. But that won’t last forever.

“We’ve seen these constraints begin 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 to another lender. If a lender has declined you for a credit score of 690, you can likely 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 rejected. It could have been your credit score, or it could be that you haven’t been at 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 approved is usually pretty easy, but there are opportunities to let things go sideways. Here are a few things to avoid.

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

Assuming your terms are final: Again, getting pre-approved for a mortgage is not the same as officially underwriting and insuring your loan. Your terms may change. For example, interest rates fluctuate, and unless your lender says your rate is locked for 30 or 60 days, your final rate may vary, albeit slightly. If the information you provide is incorrect, it may also change your final terms.

Taking on new debt between pre-approval and acceptance: Incidentally, your own financial choices can change your loan terms or derail the loan altogether. Once you’re pre-approved, it’s time to wait for major financial changes. That means no changing jobs, no new credit cards, no big purchases like a new car.

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

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