Owning a home—it’s the American Dream. But it’s also one of the biggest financial decisions you can undertake. Knowing your current financial situation helps ensure you buy a home you can comfortably afford. Before you begin your house search, obtaining a mortgage pre-approval is an important first step.
If you’re considering buying a home, read on! The financial sages behind MoneyWizard will share what you need so you can speed up the approval process.
What is a Mortgage?
A mortgage is a debt instrument (a loan) which is taken to buy property or land that is collaterally secured by real estate. You purchase property without having to pay the entire cost upfront. You then repay the loan via predetermined installments over many years until you own the property outright.
Your mortgage rate is the interest charged on a mortgage. Mortgage rates can either be fixed at a specific rate, or variable, fluctuating with a benchmark rate. If, as a borrower, you fail to pay the mortgage, the lender may foreclose. Today, there are many mortgage lenders in the marketplace. Based on your zip code, the lenders may be bank or non-bank lenders.
What is a Pre-Approved Mortgage?
An important step towards securing a mortgage is getting a pre-approval letter after consultations with your preferred lender. This allows you to discuss loan options and budgeting. It also helps you to clarify your considered budget for your home in terms of monthly installments.
As a borrower, understanding the meaning and importance of a pre-approved mortgage is crucial. A pre-approved mortgage is an in-principal commitment from a mortgage provider to give you a loan of a specified amount which should be repaid at a specified rate and by a specified date.
Why Get Pre-Approved for a Mortgage?
Getting a pre-approval saves you a lot of time when searching for a home as you are limited to options within your price range. Also, when you are set to make offers for a home, a seller will most likely ask to see your mortgage pre-approval. Showing a pre-approval letter is a statement of your intent and will help you receive preferred service.
Home sellers may also ask for proof of funds as evidence of your seriousness. Luckily for you, this will be confirmed by your pre-approval. Due to intense buyer demand, you stand a better chance for your offer to be considered if you have a pre-approval letter. Most importantly, should interest rates fall when you are locked in, your lender is obligated to honor the lower interest rates.
Furthermore, getting pre-approved can assist you in identifying income shortfalls and an opportunity to prepare a budget in advance of taking on your mortgage. For instance, you could seek a pre-approval six to twelve months before a serious home search—this is sufficient to help you sort out your credit issues while saving for a down payment and solidify your credit profile.
How to Get Approved for a Mortgage
Getting approved for a mortgage involves filling out a mortgage application whereby you provide your Social Security Number (SSN) and other personal details. This enables prospective lenders to perform a hard credit check on you. After filling the pre-approval forms, you will go through the mortgage pre-approval process. This involves evaluation of your credit score, credit report, and employment history among others.
Before you start shopping around for a mortgage, order a copy of your credit report. Make sure it does not contain any errors. A potential lender will look at your credit report before approving you for a mortgage. If you don’t have a good credit score, the mortgage lender may refuse to approve your mortgage, approve it for a lower amount or at a higher interest rat or only consider your application if you have a large down payment.
Steps to Getting a Mortgage Pre-Approval
Upon application for a mortgage, a prospective lender delves into your credit history by pulling your credit report and credit score so as to determine whether you are creditworthy. This determination is what informs your prospective lender whether they can grant you the mortgage facility or not. Having bad credit can negatively impact your credit score and consequently, your mortgage application.
In addition to your credit report, the lender will require all your bank account data, assets, debts, income, and employment history. They will also ask for your past addresses and any other details that support your ability to service the mortgage. This information is also used to compute your debt-to-income and loan-to-value ratios, both fundamental factors in the determination of the interest rate and ideal loan type according to your financial credentials.
Provided your credit report is acceptable, and you are pre-approved for a mortgage, you are furnished with details of how much you can spend to purchase a home, your monthly mortgage payment, and your rate for the initial mortgage term.
What Do You Need to Speed up Pre-Approval?
The following items can help demonstrate that you are serious about owning a home and speed up the pre-approval process:
- Evidence of assets and income
- Good credit report and score
- Evidence and verification of employment
- Down payment
- Debt service ratios
- Supporting documentation which includes:
- Bank statements for 60 days
- Pay stubs of 30 days
- W-2 tax returns from the last two years
- Schedule K-1 for self-employed borrowers
- Income tax returns
- Asset account statements
- Driver’s license or US passport
A Lender Could Still Refuse You: Pre-approval vs Pre-qualification
Many mistakenly consider pre-qualification and pre-approval to be the same thing and therefore use the terms interchangeably; however, there is a significant difference. A pre-approval entails all the factors mentioned above.
A pre-qualification, on the other hand, is when you present an overview of your finances, income, and debts to a mortgage lender, who in turn, provides you with information on the estimated loan amount that can be granted to you. The lender neither pulls your credit report nor verifies your financial information.
Considering these facts, a pre-qualification is less rigorous when compared with a pre-approval. A pre-approval means that the lender has checked your creditworthiness and verified your documentation and can therefore approve a specified loan amount or decline your application altogether.
How Long Does Mortgage Approval Take?
Typically, mortgage pre-approval takes one to three days. Conversely, mortgage approval takes two to six weeks. This is so because finances and credit profiles are prone to change over very short periods. Because of these dynamics, lenders impose expiry dates on letters of pre-approval.
Ideally, pre-approval letters from mortgage service providers are valid for 60–90 days. If the pre-approval expires before the mortgage is approved and granted, then you go back to square one and fill a new mortgage application with updated paperwork.
Knowledge is power! Sourcing advice from mortgage professionals such as mortgage brokers is always a plus. Apart from giving you expert advice on your application, they will help you compare mortgage prices and negotiate for a good deal—they’ ll also walk you through the pre-approval process.