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When you get pre-approved for a mortgage, your lender will go deeper into your finances to verify your income, assets, and credit. So, when and how should you get pre-approved?
- If you’re considering buying a house in the next six months, you should consider getting pre-approved now. This will help you plan for the home you can afford.
- To get a pre-approval, contact any lender. (It doesn’t have to be the lender you ultimately use for your home loan.) The lender will review your finances, and will give you a pre-approval letter which states exactly how much money you have been approved to borrow.
- Sellers won’t accept an offer without a pre-approval letter, so it’s important to complete this process before you make an offer on a house.
Should you get “pre-qualified” or “pre-approved”?
One of the first steps to home buying is finding out whether a bank will approve your mortgage request. There are two ways to find out — one “okay” way, and then the better way.
The “okay” way is via pre-qualification. The better way is via pre-approval. Here’s what you need to know about both.
Getting pre-qualified is okay, but not ideal
Getting pre-qualified for a mortgage is a quick and easy process. Via phone, email or internet, your lender will ask you for some basic information about yourself and — based on what you share — you can know whether you qualify for a mortgage.
Pre-qualification questions vary by lender but often include the following :
- What is your annual income?
- What is your credit score or credit rating?
- Have you recently become self-employed?
- Do you own more than 25% of a business?
- How much money do you have “in the bank”?
Your lender may also ask whether you’ve had a within the last few years; and whether you’re a U.S. citizen.
The answers to these questions can a help a lender determine for what mortgage programs you may be eligible.
The strength of a mortgage pre-qualification is that it's an easy process.
The weakness is that it's only as good as the information given to your lender.
You may think you’re telling your lender your income; or that you know your credit rating, but what if you’re wrong like so many buyers before you have been?
This is why pre-qualification letters are only “okay”. They’re a non-verified guess of how much home you can afford. Guesses will do you very little good.
Pre-approvals are a better approach.
Why is it better to get pre-approved?
Getting pre-approved for a mortgage takes more time than getting pre-qualified. The extra time pays off wonderfully, too.
In the mortgage pre-approval process, your lender will go deeper as compared to a prequalification. Instead of just being asked about your income, your assets, and your credit, you will be asked to prove it.
For example, your lender will ask about your money “in the bank” and whether it’s from your job; or, from a 401(k) withdrawal; or, from a cash gift for downpayment; or, from some other source.
The funds will be verified with bank statements.
Your lender will also ask to review your most recent W-2s and tax returns in order to confirm your “eligible income”. This figure is then compared to your credit report to determine your personal debt-to-income (DTI) ratio.
is a key mortgage qualification standard.
Buyers with a debt-to-income ratio below 40% may be eligible for all available loan types include conventional financing, FHA and VA mortgages, and USDA. However, buyers with a DTI between 40-45% may be limited to products via the FHA or VA.
Pre-qualifications don’t verify debt-to-income. Pre-approvals do.
"Sellers don't consider offers from people who haven't taken the time to determine if they can even get approved for a loan in the first place."
Pre-approvals also uncover hidden collections, judgments and liens which may stand between you and your approval.
For all of these reasons, home sellers and their REALTORS® insist that home buyers submit a valid pre-approval letter along with their initial offer for the home.
Sellers don’t consider offers from people who haven’t taken the time to determine if they can even get approved for a loan in the first place.
This is why pre-approval letters are important. They’re typically required to even offer on a home.
Get a binding pre-approval at little or no cost to you
Sellers don’t accept an offer without an accompanying pre-approval letter. Thankfully, getting pre-approved is easy.
First, contact a lender. It can be any lender — you can even submit for a rate quote and letter by using this form.
You don’t need your “hometown” bank to write your pre-approval, and it certainly doesn’t have to be the lender you’ll use when you ultimately choose from whom you get your home loan.
The important part is that you (1) Speak to a lender, and (2) Get the letter.
When you contact a lender, then, be open and honest about your financial background.
Today’s mortgage lenders perform tons of due diligence; much more than during the 2000s. Whatever you attempt to “hide” from a lender, they’ll ultimately uncover — and hiding information may be cause to deny your loan.
Even if it’s something as simple as a side-business you’ve recently started which currently earns absolutely no income, share it with your lender. Ultimately, the business may not affect your approval but let your lender determine what’s important and what’s not.
You should also alert the lender if you’re carrying non-credit reporting debts such as a personal loan from a friend or family member.
Lastly, allow the lender to “pull your credit”.
Does getting pre-approved hurt your credit?
Getting pre-approved does not hurt your credit in any significant way.
Applying for any type of credit is a normal part of financial life. Credit bureaus do not “ding” you for a credit pull as you are getting pre-approved.
According to MyFico.com, the credit score impact of a mortgage-related inquiry is less than 5 points — usually not enough to hurt you.
This even applies if you request pre-approvals from multiple lenders. Many inquiries are treated as one as long as they all occur within 30-45 days, depending on the credit scoring method your lender uses.
However, you may see your score drop if you have applied for other types of financing lately. For instance, if you just got a car loan, a new credit card, and refinanced your student loan in the past month, adding the mortgage credit inquiry could do some damage.
That’s because credit bureaus assume you are close to bankruptcy or default if you try to finance a lot of things at once.
For most applicants, though, requesting a pre-approval won’t derail their home-buying efforts.
I’m not buying for another 6 months. Should I get pre-approved?
Yes. You simply can’t guess your approved home purchase price. Many buyers are quite surprised at how much or how little they can buy.
If you plan to buy in 6 months, you should be looking online and tracking home prices. But you should be realistic. There’s no use assuming you can qualify for a certain price range, then find out you have to lower expectations when the time comes.
Preparedness is an indisposable quality when buying a home.
Get a pre-approval in-hand today
Mortgage rates are low and it’s an excellent time to consider buying a home — just be sure to get pre-approved first. It costs no money to chat with a lender and there’s never an obligation to proceed whatsoever.
Get started with your home purchase today.