How to get pre-approved for a mortgage

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A mortgage pre-approval involves a lender withdrawing your credit and examining your financial situation to see if you qualify for …

A mortgage pre-approval involves a lender withdrawing your credit and examining your financial situation to see if you qualify for a home loan and how much you can afford.

You will need to provide several documents, including pay stubs, tax forms, and bank statements, so that the lender can verify your income, debts, and assets. If you qualify based on this information, the lender will estimate how much you can borrow and document it in a pre-approval letter.

When you’re ready for pre-approval, it can help to understand how this step works and do a little preparation.

[Read: Best Mortgage Lenders.]

Mortgage pre-approval vs prequalification

During the mortgage application process, you may hear lenders use the terms pre-approval and pre-qualification interchangeably. Both refer to types of approvals that verify that you can pay off a mortgage, but they are slightly different.

Prequalification. “A prequalification is just a quick snapshot of a borrower’s financial situation with mostly verbal information they provide,” says Paul Wendland, mortgage banker at SouthState Bank in Florida.

The lender collects financial information from you, but does not pull your credit report or review the documents to determine what you can afford. After your screening, you will receive a letter that will give you an idea of ​​your loan amount, interest rate, and other terms.

The letter is usually good for 30 to 90 days to show an agent or salesperson that you are working with a lender. Typically, prequalification is a solid first step, but does not have the same weight as pre-approval because the lender has not checked your credit history and financial information.

Pre-approval. “A pre-approval is a bit deeper” than a pre-qualification, says Wendland. “We actually get the official income documentation and asset information, such as bank statements and retirement accounts, and we take a closer look at their credit. ”

Pre-approval gives you a clearer picture of your mortgage terms because it is based on a more comprehensive review of your finances. A pre-approval letter usually includes estimates of your loan amount, interest rate, and monthly mortgage payment, as well as an expiration date.

The length of your pre-approval depends on your lender, but up to 90 days is common, according to Rocket Mortgage.

When you’re ready to shop for a home and you’re sure you’ve found great deals with a few lenders, move on to mortgage pre-approvals.

Getting pre-approved is crucial, says Trent Davis, Associate Real Estate Broker at Coldwell Banker Residential Real Estate – Florida. “If you find that real estate you want, a seller, for the most part, won’t consider your offer until you can provide a pre-approval letter,” says Davis.

While a pre-approval letter gives you a head start over other buyers who don’t, it doesn’t guarantee you a loan. It is also not a binding agreement, which means that you can still search for lenders once you have selected a home.

[Read: Best Mortgage Refinance Lenders.]

How to get pre-approved for a mortgage

Understanding the mortgage pre-approval process can help you prepare your finances accordingly. What to do:

Make a financial plan. Figure out how much you can afford to pay on a loan each month before the lender makes a recommendation.

The amount for which you are pre-approved depends on your debt-to-income ratio. Most lenders like to see that your combined debt is less than 36% of your pre-tax income, although you can be approved with a DTI of 45% to 50%.

Remember, you’ll also need enough money to cover your down payment, which can be up to 20% for a conventional mortgage, and closing costs.

Check your credit report. You can check your report from each of the three credit bureaus online every week through April 2022 on AnnualCreditReport.com.

Your credit history and credit score are important factors in knowing if you are pre-approved and what interest rate a lender is charging you. If your score can improve, you can do it by paying off your debts and making payments on time every month.

Also be aware that lenders are easing credit restrictions put in place at the start of the pandemic to reduce the risk of default and foreclosure. Compared to the heyday of COVID-19, “lending standards have continued to ease,” says Andrina Valdes, COO of Cornerstone Home Lending Inc.

Gather your documents. Lenders will look at your credit history, income, assets, and debts to see if you should be pre-approved for a mortgage. Before requesting pre-approval, gather your:

– W-2 forms from the last two years.

– The most recent pay stubs.

– Copies of income tax returns for the past two years.

– Personal bank statements for the last two to three months.

– Identification, such as a driver’s license.

If you are self-employed, you will need more documents, including:

– An audited income statement.

– Corporate income tax returns for the last two tax years.

– Documentation of other sources of income, such as social security payments.

– Business bank statements for the last two months.

Research lenders. Ask questions and talk about closing deadlines. Take notes on your experience.

A good lender will explain your options to you, help you find the mortgage that’s right for your financial situation, and disclose all costs.

After closing, find your loan manager, who processes your mortgage payments. You can use the Consumer Financial Protection Bureau and the Better Business Bureau’s complaints database for your research.

Apply and compare offers. You can apply for pre-approval after using pre-qualification to narrow down your options to a few lenders with the best rates and fees.

With pre-approval, you may be able to negotiate better terms by pitting lenders against each other. “I would suggest getting pre-approved from a lender and handing it over to someone else and saying, ‘Hey, can you beat that? ”, Says Davis.

Even a small difference in your interest rate can make a substantial difference in the amount you pay over 30 years.

How long does it take to get pre-approved for a mortgage?

The pre-approval process can take one to three days, but it can take longer during times of high demand. The time you take to collect the documents can also affect your wait.

You can speed up the process by collecting documents before you apply.

Are Mortgage Pre-Approvals Affecting Your Credit Score?

Getting pre-approved for a home loan can temporarily lower your credit score by a few points, as the lender puts a lot of pressure on your credit in the process.

However, you can shop without worrying about hurting your credit. Multiple credit checks performed by mortgage lenders over a 45-day period will count on your credit report as one request.

[Read: Best Adjustable-Rate Mortgage Lenders.]

Improve your chances of being pre-approved

There are steps you can take to avoid being denied mortgage pre-approval.

A borrower “might have the income, but something about their credit is preventing them from being able to go ahead with the mortgage,” Wendland says. “If they get rid of it first, it gives them a clear path to buy their house.”

How to clear your way:

Correct the errors on your credit report. Credit reports are not perfect and errors can occur that affect your score. Find and correct errors in your credit report before you apply for mortgage pre-approval.

Pay off the debt. Debt can hurt your credit and is a factor in the amount of loan you might receive. Eliminating as much debt as possible can put you in a better position for mortgage pre-approval.

Save more. Saving is a good decision for your finances, but it will also make you a better candidate for a loan in the eyes of the lender.

Aim to save at least three months of mortgage payments to help cover financial emergencies without going into debt. If you can save up to six months of your monthly expenses, that’s even better in the long run.

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How to get pre-approved for a mortgage originally appeared on usnews.com

Update 09/30/21:


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