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- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Mortgage Pre Approval
Getting pre-approved for a mortgage can be an important step to take when you are searching for a home.
To discuss your loan options and budgeting with the lender the first step is to consult with a lender and obtain a mortgage pre approval letter, this step will help you to be clear of your total house-hunting budget and how much the monthly mortgage payment you can afford.
As a homebuyer and a borrower, it’s important to know what a mortgage pre approval does and doesn’t do, and knowing the ways to up your chances of getting one.
When a borrower goes through the mortgage pre approval process it allows him to shop interest rates and find the best deal from several lenders.
To know if the buyer is genuine the sellers usually want to see a mortgage pre approval letter and, sometimes they also want proof of funds to show that a buyer is serious.
So a borrower should start by filling out a mortgage application and supplying their Social Security number so the lender can do a credit check, then provide documentation of job history, assets and liabilities, income tax returns, and whatever the lender asks for.
Additional documentation needs to provided by self-employed buyers. And only after reviewing the application, a lender will offer pre-approval, pre-approval with conditions, or decline the pre-approval.
A Physical Examination of Your Finances is Pre-Approval
Lenders will look at the following key factors before they decide to pre-approve you for a mortgage
- The borrower’s credit history
- His credit score
- The debt-to-income ratio
- The borrower’s employment history
- The income drawn
- His assets and liabilities
For a pre-approval, lenders will dig into the borrower’s financial life as a way of confirming if they will repay their mortgage.
What is the Difference Between Pre-Qualification and Pre-Approval
Usually, both the term, pre-qualification, and pre-approval are used interchangeably, but they are not the same.
When you provide an overview of your finances, income, and debts to a mortgage lender it is prequalification.
After which the mortgage lender gives you an estimated loan amount.
A mortgage prequalification is an estimate of how much you can afford to spend on a home.
A prequalification is a helpful starting point to determine what you can afford.
The lender doesn’t pull your credit reports or verify your financial information in case of pre-qualification.
A pre-approval involves filling out a mortgage application and providing your Social Security number for the lender to do a hard credit check.
When you apply for a mortgage a hard credit check is triggered. A lender pulls your credit report and credit score to assess your creditworthiness before deciding to lend you money for the process of pre-approval.
These credit checks are recorded on your credit report and can impact your credit score.
In contrast to hard credit checks, when you pull your credit yourself, or when a credit card company or lender pre-approves you for an offer without your asking it is a soft credit check, and these soft credit checks do not impact your credit score.
When to Get a Mortgage Pre Approval
A mortgage pre approval letter is usually valid for 60 to 90 days. your finances and credit profile could change at any time so lenders put an expiration date on these letters.
You’ll have to fill out a new mortgage application and submit updated paperwork to get another one when the earlier pre-approval expires.
If you’re just starting to think about buying a home and having doubts about getting a mortgage, then going through the mortgage pre approval process will help you identify your credit issues and give you time to sort them.
When you are on a serious home hunting spree, seeking pre-approval six months to one year in advance puts you in a stronger position to improve your overall credit profile.
You’ll have more time to save money for the down payment and closing costs.
A seller often wants to see a mortgage pre-approval when you are ready to make offers, and, also proof of funds in some cases to show that you’re a serious buyer.
Sellers have an advantage in many hot housing markets, because of the intense buyer demand and limited homes for sale; so the sellers are less likely to consider offers without pre-approval letters.
The Process of Mortgage Pre Approval
The timeline of pre-approval depends on some factors like your finances the lenders, some online lenders can pre-approve you within hours, and some lenders can take several days.
You need to start by filling out a mortgage application, including your identifying information, your Social Security number so the lender can pull your credit.
We suggest you shop for multiple lenders in a short timeframe because mortgage credit checks count as a hard inquiry on your credit reports and it impacts your credit score the combined credit checks count as a single inquiry.
The newer FICO scoring models are usually for 45 days.
There are eight sections of mortgage applications which are:
- The loan type and term
- Property description and purpose of loan
- Complete information of the borrower
- Information about his employment
- His income and combined housing expense information
- List of assets and liabilities
- Transaction details
- Declarations
Within three business days of receiving your completed mortgage application, the lender needs to provide you with a three-page document called a loan estimate.
Which specifies a maximum loan amount, based on your financial picture this will help you narrow down your home-buying budget.
Your loan file when pre-approved for a mortgage, will get transferred to a loan underwriter who will verify your documentation against your mortgage application.
The underwriter will also ensure that you meet the borrower guidelines for the specific loan program that you’re applying for.
The documents needed in order to be pre-approved –
- Bank statement of 60 days
- pay stubs of 30 days
- Tax returns(W-2) of previous two years
- Form 1065 if you are self-employed,
- IT returns
- Asset account statement
- Your American Passport
- If divorced then divorce papers
- If receiving a financial gift from a relative then a gift letter
What will Impact your Mortgage Pre Approval?
Mortgage Pre Approval letter
Your lender will give you a pre-approval letter on an official letterhead, which will indicate to sellers that you’re a serious buyer and verifies that you have the financial means to make a good offer to purchase their home.
When buyers have a pre-approval letter then the sellers will be more willing to negotiate.
A pre-approval letter includes the purchase price, loan program, interest rate, loan amount, down payment amount, expiration date, and the property address. The letter is submitted with your offer.
Just because you got a pre-approval you are not obligated to borrow from a specific lender. you can choose the lender with the best rate and term that fits your needs when you’re ready to make an offer.
Conclusion
We all know that applying for a mortgage can be exciting, nerve-wracking, and confusing.
For a pre-approval, the lenders add up your debts and other credit along with your new mortgage payment so your DTI ratio should be below 43% of your gross monthly income.
Similarly, your LTV is another metric lenders evaluate, which depends on the down payment you can make (ideally 20% of the loan amount) otherwise it attracts a PMI.
Then a positive credit history and score play an important role, along with your financial stability are the keys for smooth mortgage pre-approval.
Also, note a seller will be willing to negotiate if you have proof that you can obtain financing. Go through the pre-approval process with several lenders to find the best deal.
