How to Get Pre-approved for a Mortgage
Getting pre-approved for a mortgage can be a crucial step in the home-buying process. Consult with a lender and acquire a pre-approval letter to discuss loan alternatives and budgeting with the lender; this step can help you clarify your entire house-hunting budget as well as the monthly mortgage payment you can afford.
As a borrower, understand what a mortgage pre-approval is (and isn’t), as well as how to improve your chances of acquiring one.
Pre-approval Is a ‘Physical Exam’ for Your Finances
Before deciding whether to pre-approve you for a mortgage, lenders will consider the following factors:
- Debt-to-income (DTI) ratio
- Loan-to-value (LTV) ratio
- Credit history
- FICO score
- Income
- Employment history
Consider a mortgage pre-approval as a financial, physical exam. Lenders will most likely investigate every aspect of your financial life in order to ensure that you’ll be able to repay the loan.
Pre-qualification vs. Pre-approval
You’ve probably heard the terms “pre-qualification” and “pre-approval” used interchangeably, but they’re not the same. A pre-qualification letter gives a mortgage lender a summary of your finances, income, and debts. After that, the mortgage lender provides you with an expected loan amount.
A mortgage pre-qualification might serve as an estimate of how much you can afford to spend on a property in this way. The lender, on the other hand, does not pull your credit records or verify your financial data. As a result, pre-qualification is a good beginning point for determining what you can afford, but it has no bearing for making bids.
A pre-approval involves completing a mortgage application and supplying your Social Security number so that a lender may run a rigorous credit check on you. When you apply for a mortgage, you will be subjected to a hard credit check. Before opting to lend you money, a lender examines your credit record and credit score to analyse your creditworthiness. These checks will appear on your credit report and may have an effect on your credit score.
A soft credit check occurs when you draw your own credit or when a credit card firm or lender pre-approves you for an offer without your permission. Your credit score is unaffected by soft credit checks.
You’ll also include all of your bank account information, assets, debts, income and job history, previous addresses, and other important factors that a lender will need to verify. The reason for this is that a lender wants to know that you will be able to repay the loan. Lenders use the information you supply to determine your debt-to-income (DTI) and loan-to-value (LTV) ratios, which are important considerations in deciding your interest rate and loan type.
A pre-approval is far more beneficial than a pre-qualification because of all of this. It indicates the lender has investigated your credit and validated your paperwork in order to approve a specified loan amount. When you have an appraisal and the loan is applied to a property, you get final loan approval.
When to Get a Pre-approval
Pre-approval letters for mortgages are usually good for 60 to 90 days. Because your finances and credit profile may change, lenders include an expiration date on these letters. To acquire a fresh pre-approval, you’ll need to fill out a new mortgage application and provide updated documentation.
If you’re just getting started thinking about purchasing a house and feel you’ll have trouble receiving a loan, going through the pre-approval procedure can help you detect credit issues—and allow you time to fix them.
Pre-approval six to one year before a serious property hunt will put you in a better position to improve your overall credit rating. Additionally, you’ll have more time to save for a down payment and closing costs.
When you’re ready to make an offer, a seller may need a mortgage pre-approval letter and, in some situations, proof of finances to show that you’re a serious buyer. Because of high buyer demand and a limited number of houses for sale in many hot property markets, sellers may be less reluctant to consider bids without pre-approval letters.
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