Why is a Pre-Approval Important for Mortgages?
A prequalification for a mortgage is where a lender relies on information provided by the buyer to estimate how much it would be willing to lend to them. It is different than a pre-approval which is where the lender verifies the borrower’s information and documentation to determine exactly how much they are willing to lend. A pre-approval can help you before you go house hunting in the competitive market. You can find the house of your dreams, but if you don’t have a pre-approval to get a bid on the home, it could be bought out from under you before you even finish the paperwork. Also, no preapproval usually means no accepting an offer. While you can make an offer without preapproval, no decent real estate agent will approve a proposal without a preapproval. So not doing it beforehand can take longer.
Lastly, you need to know where you stand when trying to buy a home. Underestimating what a lender will give you could leave you short-handed. Another common condition in a mortgage pre-approval is that the buyer finds a property and has an appraisal done on the property to make sure it is worth what the buyer is asking.
Things Needed for Mortgage Pre-Qualification:
- • Proof of Income – This can include W-2s, Tax Records, award letters, and more usually for the last two years.
- • Proof of Assets – Usually bank statements for the previous two years, vehicle titles, land titles, home titles, and anything else the government can consider an asset you now own. In some situations, this will also show your savings to use as a down payment. If you have a friend or relative lending you money as a down payment, then you may need a letter explaining their gift contribution.
- • Credit – There are all kinds of loans, but depending on your credit score you may end up with a better or worse rate than you think. Most lenders like people with scores above 720 but can work as low as 620. Some lenders will go with scores as low as 580, but they usually require a much larger down payment. Having no credit history can also hurt you.
- • Employment Verification – They like to know you have a steady income and will be able to make payments on time. Verification documents can include a verification form or bring in the last 90 days of paystubs.
- • Documentation – Some materials used to verify both your identity and credit score you will need to produce can include birth certificate, social security card, and driver’s license or another form of photo ID.
Personal Information and How it is Used for Pre-Qualification
When applying for preapproval, you’ll fill out a mortgage application and supply identifying information to pull your credit. When lenders do a credit check for preapproval, they make a hard inquiry. While this may affect your credit score, if you have multiple pulls fro lenders (usually all within 45 days of each other) they will often combine the credit checks to one inquiry. Some of the things they will ask on the mortgage application include:
- Type and Term of the Mortgage
- Property Information and Loan Purpose
- Borrower Information
- Employment Information
- Monthly Income and Expenses
- Assets and Liabilities
- Details of Loan Transaction
Once you provide all documentation and application, the lender is required by law to provide you with a three-page document called a loan estimate within three business days. It lets you know if you have been pre-approved and if so outlines the loan amount, terms and type, interest rate, estimated interest and payments, estimated closing costs, an estimate of property taxes and homeowner’s insurance, expiration date, and any unique loan features. Many factors impact your mortgage pre-approval. These include:
- Debt to Income Ratio (DTI) – Measures all of your monthly debts/bills to the income coming into your home. They take your total debt including potential mortgage then divide that sum by your gross monthly income to get a percentage. Depending on the loan type, most borrowers should maintain a DTI ratio of 43% or below to qualify for a mortgage.
- Loan to Value Ratio (LVR) – This divides the loan amount by the home’s value. A property appraisal determines the property’s value, which might be lower or higher than the seller’s asking price. This timeframe is also where your downpayment comes into play; the higher your down payment, the lower your loan amount and as a result the lower your LTV ratio.
- Credit History and FICO Score – Lenders will pull your credit scores from the three main reporting bureaus: , , and . They will look over your payment history to see if you pay bills on time, have any bad-debt accounts, bankruptcies, or any other major financial issues that could affect your ability to pay the mortgage. Besides, lenders analyze how much available credit you actively use, also known as credit utilization. Maintaining a credit utilization rate at or below 30% helps boost your credit score, and it shows a consistent pattern of paying your bills and managing debt.
- Income and Employment History – Lenders like to make sure you have a stable income and stable employment before starting a long-term loan with you. This reasoning is why lenders request two years worth of W-2s and contact information for your employers for the last two years. Verification documentation can include the previous 60 days of bank statements and the previous 90 days of paychecks.
Please contact our lenders if you have any questions regarding our pre-approval or loan process.