Mortgage Pre-Approval: It’s Not as Complicated as You May Think

Exactly What is “Pre-Approval” For a Mortgage?

Home buying all starts with the paperwork. But it doesn’t have to be confusing. And that starting point is not with a realtor but with a mortgage lender. First, we need to understand the definitions of essential parts of this process and what you need to do in each part.

Pre-Qualification vs. Pre-Approval

What is Mortgage Pre-Qualification?

When you pre-qualify for a home loan, you’re getting an estimate of what you might be able to borrow. This estimate is determined by the unverified information you provide to a mortgage lender.

What is Mortgage Pre-Approval?

Pre-Approval, meanwhile, proves your creditworthiness. After you complete a mortgage application, the lender will verify the information you provide and perform a credit check. If you’re pre-approved, you’ll receive a Pre-Approval Letter- which is an offer to lend you a specific amount of money for a qualified home. Pre-Approvals are usually valid for 90 days.

How Do I Get a Mortgage Pre-Approval?

What you need to give a mortgage lender for your pre-approval.

1. Proof of Income

Financial preparation to buy a home is critical. Prospective buyers generally must produce the following personal financial information for a Pre-Approval Application:

  • W-2 Wage Statements from the past two years.
  • Pay stubs showing the most recent 60 days income as well as year-to-date income.
  • Proof of any additional income such as alimony, rentals, side gigs, and or bonuses.
  •  The two most recent years’ tax returns.

2. Proof of Assets

As a borrower, you will also need to show copies of your financial assets:

  1. Bank Statements
  2. Retirement Accounts
  3. Investment Accounts and any property you may fully own.

3.    Credit Score

Most lenders require a FICO score of 620 or higher to approve a conventional mortgage. Or a higher down payment may be required. You can find multiple free credit score providers online.


Know What You Can Afford

GOOD NEWS- it’s not as hard as you may think to figure out how much of a mortgage you can afford.

The Home Buyer’s Guidance Home Affordability Calculator is the tool to determine how much of a mortgage you could be approved for. Using this calculator will give you a good idea of the amount you could potentially borrow.

Debt-To-Income Ratio

This ratio (DTI) calculates the percentage of the gross income you need to cover your debts. We all have them. We all hate them. Debts include credit card payments, child support, and other outstanding loans (student, auto, etc.).

In other words, if you have $2,500 each month in debt and you make $5,000 each month, your DEBT-TO-INCOME RATIO is 50%…your debt requires you to pay half of your monthly income.

Most mortgage lenders recommend that your debt-to-income ratio not exceed 43% of your gross income. Use the Home Buyer’s Guidance Calculator to figure out your DTI.


How to Compare Lender Rates

Before you choose a mortgage offer, it’s essential to shop around and compare multiple lender rates to get the best deal.

In a 2018 Consumer Financial Protection Bureau study, an average borrower could have saved $300 a year, or $9,000 over a 30-year mortgage, with some shopping for the best rate available.

Before comparing mortgage offers and rates, consider the kind of mortgage you want. Common loantypes include:

  • Conventional loan
  • FHA loan
  • USDA loan
  • VA loan


Mortgage Amortization

The money numbers…

Amortization on a mortgage refers to the process of making regular payments of interest and principal to repay the loan in full by its due date.  At the beginning of your loan period, a higher percentage of the monthly payment goes towards the interest amount you owe. But, with each subsequent payment, a greater portion of it goes toward the loan’s principal… initial amount borrowed.

So Why is Having a Mortgage Pre-Approval So Important?

A Pre-Approval lets you know what amount you have to work with and demonstrates to a home seller that YOU are- A More Attractive Buyer!

(If two buyers make an asking price offer on a home and only one has a mortgage pre-approval, which offer do you think the seller will be more likely to accept?)

It Gives You More Room to Negotiate. A seller knows that an offer from a pre-qualified buyer is as close to a sure thing as they can find. That may make them more likely to make compromises to sell faster.

You May Close Faster. Most closings take about 50 days. With a pre-approval in hand, the process can move faster, so you can move into your new home earlier than you might have been able to do otherwise.

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