Getting preapproved for your mortgage is essential, especially if you’re a first-time home buyer. The term “preapproval” is often used interchangeably with pre-qualification, but there are some differences.
Getting preapproved shows sellers and real estate agents that you are serious about buying a home. To get preapproved, lenders review your financial situation and debt-to-income ratio.
Your credit score
Getting preapproved for a mortgage is important for home buyers because it shows sellers that you are a serious buyer and can afford to buy a home. To get preapproved, lenders typically take a hard look at your credit report and score.
You can apply for preapproval with several lenders at once, as long as you do so within a 30-day window. This will help ensure that the multiple inquiries do not hurt your credit score too much.
To get preapproved, you’ll fill out a mortgage loan application and provide financial documents such as W-2s and bank statements. A lender will then run a credit check and verify your income and assets.
You’ll be given a letter that states the maximum amount of money you can borrow, which should reflect the price range of homes you can afford to shop for. Having a preapproval also helps to speed up the mortgage process when you’re ready to make an offer on a home.
Your income
Getting preapproved for a mortgage means you can start shopping for homes with confidence. It also helps you determine how much of a mortgage payment you can afford to make. Ideally, experts recommend that you spend no more than 30% of your gross monthly income on housing costs, including homeowners insurance and HOA fees.
You can improve your chances of getting preapproved for a mortgage by improving your debt-to-income ratio. You can do this by reducing your credit card debt or limiting the amount of money you pay toward other existing loans and leases.
Generally, the mortgage loan application process requires that you provide financial documents like pay stubs and bank statements. Some lenders can give you an official Loan Estimate within a few days after you submit all of these documents, but this timeline may increase for those with more complicated financial histories.
If you get declined by a lender, it is important to understand the reason why so you can address the issue and reapply for a mortgage in the future.
Your assets
In order to qualify for a mortgage, you need assets that can cover the down payment and closing costs. Increasing your assets can help you meet this requirement. While this may take time, it is important to do so before beginning the home buying process.
During the preapproval process, you will need to provide your credit information, financial documents and employment history. The lender will review these items and determine if you are eligible to get a loan, and for how much. They will also likely run a hard credit check. This is different from a soft credit check, which is used by lenders to give you rate quotes and does not impact your credit score.
It is a good idea to shop mortgage lenders early in the process to compare rates and guide your house hunt. This will ensure you do not overspend on a home and allow you to make any necessary adjustments in advance of your purchase.
Your debt
Mortgage preapproval is the first step to purchasing a home and requires a closer look at your finances. It also shows sellers and real estate agents that you are serious about the purchase, proving you’re a qualified borrower.
Lenders review a variety of factors when issuing preapproval, including your credit history, debts, employment and financial assets to determine how much you can borrow. They’ll likely ask you to fill out a uniform residential loan application, which is often called a 1003 or “ten-oh-three.”
If your credit score and income are sufficient to meet a lender’s guidelines, but your current debt load is limiting how much you can afford to spend on a new home, you can try to improve your situation before applying for preapproval by paying down other debt or by avoiding taking out additional loans. Ideally, you want to have your debt-to-income ratio below 50%. It’s also worth trying to find ways to increase your household income.