If you’re looking to purchase a new home in the near future you’ll need to get pre-approved first.
Many home buyers are overwhelmed with the complexity of the home buying process.
Maybe you’re asking yourself how can I get pre-approved for a home loan?
In this article we’re going to show you everything you need to do to get pre-approved for a mortgage in a few easy steps.
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What is a Pre-Approval?
A pre-approval for a mortgage is when a lender has pulled your credit report and verified documentation. You will be issued a pre-approval letter stating the maximum amount you can spend. You will need a pre-approval letter to submit along with your offer.
Pre-Qualified vs Pre-Approved
When you’re pre-qualified for anything it really just means you meet the credit requirements based on a quick view of your credit profile and credit history. No income, employment, or tax documents are a part of the pre-qualification process.
You can get a pre-qualification letter by simply placing a call to a mortgage lender and having them pull your credit. Because the process is not very in-depth a pre-approval is needed in order to make an offer on a home.
Documents Needed to Get Pre-Approved for a Home Loan
In order to get pre-approved for a mortgage loan you will need the following documents.
1. Income Verification You will need to provide proof of your income to the loan officer. In the form of W2’s, Pay stubs, and/or Tax returns. Most mortgage companies will want to see that you have been gainfully employment with the same employer for a period of 2 years or more.
2. Asset Verification: The lender will also need to verify that you have sufficient savings to cover the down payment. The down payment amount will vary depending on the type of mortgage you need. A conventional loan could require a down payment as high as 20%, while FHA loans require just 3.5 percent. Your lender will need to see the last couple months of bank statements or investment account statements.
3. Identification: In order to verify that you are who you say you are you will need to provide a copy of your drivers license, and other form of identification. This could be a social security card, birth certificate, or copy of a bill with your name and address.
Why is a Pre-Approval so Important?
A pre-approval letter is the first step in the home buying process. It shows that you are really serious about purchasing a home and completing the mortgage process.
Many real estate agents will not even start showing you homes without one. Sellers will not accept an offer that is not accompanied with a mortgage pre-approval.
How Much will You Get Pre-Approved for?
The amount you will get pre approved for will depend on a few factors.
For one, your credit score has a lot to do with how much you’ll get approved for because the better your FICO score, the lower your mortgage rate will be.
Secondly, your debt-to-income ratio (DTI ratio) is a huge factor as well. Debt-to-income is your monthly debt payments when compared to your monthly income.
For example: If you make $10,000 per month, pre-tax. And you have a car payment, credit card payment, and your mortgage payment will come to a total of $4,000 per month your DTI ratio is 40%.
The loan-to-value ratio (LTV ratio) is the amount of the mortgage loan compared to the market value of the home. When getting a mortgage the purchase price is often used instead of the fair market value.
For example: If you’re buying a $200,000 home and you are putting 10% down then the LTV ratio is 90%.
If you are putting less than a 20% down payment then you will be required to carry mortgage insurance. Mortgage insurance premium (MIP) or private mortgage insurance (PMI) is a percentage of the loan amount that is charged on an annual basis. Usually the mortgage insurance fee is between 0.50% – 0.85%.
How can I start the Pre-Approval Process?
To start the process of getting pre-approved for a home loan you need to reach out to mortgage lenders. Just about any lender can issue you a pre-approval letter, just by receiving and even using a letter from one lender does not commit you to using them.
You can get a pre-approval letter from one lender and use a different lender to get the loan. The important thing to remember is that you are not tied down to one lender.
If you have an accepted offer you should get loan offers from at least 3 different lenders. This way you can compare closing costs, interest rates, and other lender fees to ensure you’re getting the best deal on your mortgage loan.
How To Get Pre-Approved for a Home Loan with Bad Credit
If you have low credit scores then getting pre-approved for a home loan can be difficult. FHA loans allow borrowers with a credit score of just 500 to get approved with a 10% down payment.
Before speaking to lenders the best thing you can do is try to maximize your FICO scores. Here are a couple things you can do to help improve your score before filling out a mortgage loan application.
Pay down your credit card balances
The amount of available credit you have used up on your credit cards is called your credit utilization ratio. Your utilization ratio has a huge impact on your overall FICO score.
In fact it accounts for 30% of your score, only your payment history has a bigger impact on your credit rating than your credit utilization ratio does. Try to keep your credit card balances below 15% of their credit limit.
Avoid Opening New Accounts or Having Your Credit Pulled
When a lender pulls your credit history a hard inquiry is reported to the credit bureau. Hard inquires and new accounts make up 10% of your overall FICO credit score. While not a huge impact inquires can still bring your scores down several points. One thing you don’t need when trying to get pre approved for a mortgage.
Read our article on improving your credit score in 30 days for more tips.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.