When you start to get serious about buying a home, a mortgage pre-approval is an important first step. Getting a pre-approval letter for a mortgage lets you know how much money you can borrow, the range of interest rates you qualify for and the different mortgage options available to you.
In many cases, buyer’s agents also prefer you to have a pre-approval letter before they start showing you potential properties. And most of the agents and sellers won’t even consider reviewing your purchase offer if you don’t have a pre-approval letter attached.
By getting pre-approved, you can feel confident about making an offer on a home and be one step ahead when it comes time to finalize your mortgage approval after your offer is accepted.
What is a mortgage pre-approval?
A mortgage pre-approval is documentation that shows you’re a good candidate for receiving a home loan.
To get pre-approved, you’ll complete an application and the lender will review your financial information, which includes pulling your credit report.
Once pre-approved, you’ll receive a pre-approval letter with an estimate of how much money you may qualify to borrow, the types of loans available to you and the interest rate you may be able to secure.
Is pre-qualified the same as pre-approved?
No, a mortgage pre-qualification is not the same as a pre-approval. Unlike a pre-approval, getting pre-qualified doesn’t require an in-depth review of your finances or a hard credit check.
When it comes to choosing between getting pre-qualified versus pre-approved, a pre-approval is going to be more comprehensive and give you a more accurate look at the types of mortgages you qualify for.
Nowadays, most of the real estate agents only accept Pre-Approval Letter, not the Pre-Qualified Letter, since the second one doesn’t not include the in-depth review of your finances and income.
What do you need to get a pre-approved letter?
To help you get started, here are a few steps you can do and prepare yourself before contacting a lender:
1- Collect your financial documents
To obtain mortgage pre-approval, you will need to show evidence of being in good financial standing, including proof of income, assets, and credit history. You will also need to provide identification and employment verification.
Typical documents required from each borrower include :
W2 statements (from the past 2 years)
Pay stubs (from the past 2 months)
if your income includes overtime or bonuses ( the most recent end-of-year pay stub)
Bank statements ( from past 2 to 6 months)
Driver’s license or government issued ID
Social security number
Tax returns ( from past 2 years)
For freelancers and independent contractors
Self-employed borrowers are generally evaluated differently than those who receive a regular salary or wages from an employer when it comes to buying a house. This is because their income can be less predictable and more variable.
Self-employed borrowers don’t receive W-2 forms or pay stubs from an employer, so they will need to provide the following documents to show that they have earned a steady income for at least the past two years
Business and personal tax returns – the past two years
A profit-and-loss statement
A balance sheet
Asset account statements, such as retirement or investment accounts
Any additional income, such as Social Security or disability
A copy of current state or business licenses, if applicable
IRS Form 4506-T, which allows lenders to access your tax records
2- Verify your credit score
A good credit score is essential for pre-approval. Each lender and loan type has its own minimum credit score requirements for both you and any co-applicant. Conventional loans usually require a credit score of 620 or higher.
Before applying for pre-approval, review your credit report to ensure there are no errors that could negatively impact your score.
You can get a free copy of your credit report every 12 months at www.annualcreditreport.com . If you find any errors, get them corrected as soon as possible.
Federal Trade Commission Consumer Advice offers more information about Free Credit Report. Click here https://consumer.ftc.gov/articles/free-credit-reports
Since applying for pre-approval can affect your credit score, obtaining a free credit report beforehand can give you an estimate of your current score without any negative effects. You can also use this information as a baseline to see if you meet a lender’s mortgage qualifications.
3- Consider to Opt-Out
Before you request a pre-approval letter that lenders need to run your credit report, you might want to consider to opt-out from credit and insurance offers by going to www.optoutprescreen.com or calling 1-888-5- OPT OUT ( 1-888-567-8688)
Allow at least 5 days for processing.
The main reason that we suggest clients to opt-out is to avoid unnecessary soliciting phone calls and text messages from lenders, insurance companies and credit card companies.
If you want to find out more about the Opt-Out option, Federal Trade Commission Consumer Advice provides more information and options. https://consumer.ftc.gov/articles/prescreened-credit-insurance-offers
4 – Calculate your debts
As part of the mortgage pre-approval process, your lender will review your debt-to-income ratio (DTI), which compares your monthly debt payments to your monthly income.
Different lenders and loan types have varying DTI requirements, but in general, the lower your monthly debt payments compared to your income, the better your chances of getting pre-approved, and also a better interest rate.
Mortgage lenders generally look for your most recent statements if you have any outstanding debt, which may include:
Rent or mortgage
– Recent mortgage statement
– Homeowner insurance deck page
– Property tax bill
– If it’s a rental property, a rental agreement.
Homeowners association fees (HOAs)
Car loans
Student loans
Credit cards
Personal loans
Home Insurance
Medical bills
Monthly variable expenses aren’t included in your DTI., like utilities, groceries, entertainment, and transportation expenses.
Apply for mortgage pre-approval
After gathering all the required documents and identifying a few lenders that meet your needs, you can begin the official mortgage pre-approval process.
We offer a simple way to initiate the pre-approval process, allowing you to submit all necessary documents online. Click here to setup your online account:
Once you setup your online account with us, you can take your time to fill out all necessary information, you may pause and resume anytime.
If you have any questions about the process, don’t hesitate in contacting me.
Your pre-approval letter is ready
Upon completing your application and meeting all the necessary qualifications, you will receive a pre-approval letter. The pre-approval letter will specify the amount of money you’re pre-approved to borrow.
It’s important to keep your pre-approval letter accessible. Real estate agents frequently request to see your letter before showing you houses to ensure you’re a serious buyer.
Once you find the perfect house to make an offer, this pre-approval letter will increase your chance to get accepted by sellers, because you are showing the sellers that you’ve already got pre-approved by a lender and there is no financial issue for you to buy the house.
Do I have to use the lender who gave me the Pre-Approval Letter?
No, you are not required to use the lender who gave you a pre-approval letter. A pre-approval letter is simply a statement from the lender that you are qualified to borrow a certain amount of money based on your credit score, income, and other financial information.
Even if you already have a pre-approval letter, It is a good idea to shop around for the best mortgage rates and terms before committing to a particular lender. You may find that a different lender offers a better deal, with lower interest rates and fees, which can save you money over the life of your mortgage.
Need a pre-approval letter? Contact me for more details
