If you really want to get your dream house, then getting a pre-approved home loan is your best starting point.
A mortgage pre-approval is a long stride in the bank's approval process for a loan. The bank basically promises to lend you money for your house up to a certain amount at a specified rate. Of course, this is subject to the property appraisal and other documentary requirements. With a pre-approval, you're on your way to buying your house. This is because somehow, the bank has determined you to be trustworthy.
In the mortgage pre-qualification process, the lenders do not look at many of your personal financial information. In the mortgage pre-approval process, they will scrutinize your credit and verify your income. The lender will normally give you a pre-approval letter to document the decision. The letter says they will approve your loan once you make a purchase offer on a house.
However, you must submit the lender's required documents. Usually, these are:
- Purchase contract
- Preliminary title information
- Appraisal of the property
- Your financial statements
A pre-approval does not completely guarantee that the lender will grant you a loan unconditionally.
By common practice, it is valid only for 60-90 days. Your lender's representative would be able to give you a more precise timeline.
What is a Mortgage Pre-Approval?
The pre-approval process begins with an assessment from your would-be lender. They will usually look at your credit scores, debt profile, income sources and employment history among other things. Based on their evaluation, they will determine if you are worth the risk or not. If you are, they will also set what type of loan program is good for you. More importantly, you will know how much you can borrow and what your interest rate will be.
After all this, you only need to hurdle one main concern. The lender should be able to see that the property's value offers adequate collateral for the loan amount. The home's appraisal should be more or equal to the purchase price.
Prepare Everything You Need
Generally, the lender will give you a letter to document the pre-approval. You can use to give your seller an assurance that you can get a loan after they accept your offer. Most pre-approved letters are valid for 60-90 days only so, work within that timeline.
It is a good idea to prepare ahead for the pre-approval process. Before you even look at houses with an agent, make sure you know the following information:
- Your monthly income
- Your aggregate monthly debt payment (include all loans: student loan, auto loan and credit card minimum payments)
- Your current credit score
- Any credit issues you may have had in the past
- Your intended down payment amount
- Your total budget for the house (you can use the online calculator on many websites)
The Steps For Pre-Approval Mortgage
In order to get the mortgage as soon as possible, there are a couple of steps you should aware of before:
1. Compute Your Monthly Income As Well As Your Monthly Debt Obligations
Your lender would want to know your monthly income and how much of this goes to pay off debts.
So, prepare the documents to back up your computations. Gather at least two weeks of recent pay stubs because you'll need to provide them to your lender. If you're self-employed or have variable income, it gets a bit more tedious. The lender might ask for a copy of your past one or two tax returns. Some lenders would compute the average of your last two years' income. Others might use the lower one as the basis for their evaluation.
Another important item to remember is about staying within certain ratios that lenders use to compute your loan amount. The lender may lessen the amount of loan you can get when they see that you are saddled with debts. If you're still paying for your student loan, auto loan and other loans, it will affect the new loan. If it's possible, pay off all or some of these loans first. And also avoid getting into new debts.
2. Check Your Overall Credit Profile
It would be wise to check your credit score and get your credit history report before you apply for a loan.
You want to specifically check that there is no error or negative information on your report like a past due item. While you are still looking for a house, you can subscribe to a service that monitors credit. You can get an updated personal credit report for around $20 a month. You can cancel your subscription after you've closed with your ultimate seller.
Minimum Score is 680
You should have a FICO score of not less than 680. If your score were above 700, it would be a lot favorable. If it's any less, you may have a harder time getting a loan. The bank may require you to get a highly qualified co-signer. They may even require you to improve your credit score before you get a loan. Remember too, that a lower credit score usually means a higher mortgage rate.
If your credit score is less than 680, you may want to consider getting an FHA loan. These government-insured loans accept borrowers with lower credit scores and lower down payments. The catch is, you may have to pay additional costs.
Lastly, avoid applying for a new credit in the few months leading to your mortgage application. Banks do not like borrowers who appear to be piling up on new credit. In such case, even applying for a new mobile phone subscription could raise a red flag on your lender. They might ask you to write a letter of explanation.
3. Set Your Mortgage Budget
Before you even talk with a mortgage officer, you need to determine two important items. The first is how much house can you realistically afford. The second is how much in monthly amortization will you be comfortable paying.
A good rule is to set a cap on how much of your income should go to your total housing payment. One rule is not to go over 35% of your gross (pre-tax) income. This should include all fees, taxes, and insurance.
If you have a total annual income of $84,000, 35% of that is $28,560. Breaking that into 12 months will give you $2,380 per month. That limit would be on the high side. You could lower it to 25% of your gross income. You might find some financial advisors who will give a more conservative percentage.
This is just guideline because it is really difficult to equate your monthly payment to a fixed home price. Your actual monthly expenses will contain variables like interest rate, property taxes, house insurance, etc. You may not be able to compute the exact amounts but your agents can give you a fair estimate though.
4. Figure Out How Much You Can Save For A Down Payment
The next step is to compute how much you can save for the down payment for your new house. Most lenders will require that you put up anywhere from 10% to 20% of the cost of the house. It would be lower if you were applying for an FHA loan or other special programs.
If you can afford it, we suggest you go up to 20% on your down payment. This will exempt you from getting a private mortgage insurance (PMI). This is a security that protects your lender should you suddenly forfeit on your loan before establishing sufficient equity. Its insurance for them but you will be the one paying for it. It is an expense that you want to avoid totally.
Make your mind as to your maximum budget for your house before going through the approval process.
There will be a temptation to buy a bigger, fancier house. Your agent or some unscrupulous lender may sway you with the argument that your property will appreciate later. Sometimes, you might suddenly get capricious and go over your original plan. It's better to buy something you can pay off quite comfortably and enjoy peacefully. Going to a bigger house and eventually losing it to the bank will haunt you and your family for a long time. Think through before you sign on the dotted line.
How To Get A Pre-Approval From Your Lender
As you can imagine, the pre-approval process is a serious step. It will formally signify your involvement.
First, you'll need to fill up an official mortgage application form and most probably pay an application fee. Second, you will need to submit to the lender a couple of documents so they can do a background check. They will extensively check your financial condition, credit history and current credit rating. You can proceed to this step though you haven't found a house yet – leave any item on the ‘property' blank.
From this data, the lender can already give you how much mortgage you qualify for. They can also provide you with the corresponding interest rate for the amount they have approved for you. In some cases, you can already negotiate to lock in on the interest rate you want.
The ‘no verification' or ‘no documentation' condition is an extinct animal. Although the documentation requirements will vary from lender to lender and type of borrower, they will all ask for something.
Typically, every lender would want proof of your actual income, assets and any regular payments that decrease your regular income.
It usually takes two to four weeks for lenders to complete the pre-approval. Pretty soon, with an online facility, some lenders may be able to make this faster.
Once the lender approves, you will receive a conditional commitment in writing for the exact amount of your loan. Sometimes, this will state your interest rate as well. This will help you look for a home equal or less than the pre-approved loan amount. If you have the letter, you can make an offer more quickly once you find the house you want. You and the seller won't have to worry about the financing aspect anymore. This will save a lot of time.
Once you decide on a house, you can complete the form. Just fill in the missing details about the property and your pre-approval application transforms into a complete application. The lender will do a final appraisal of the property and if everything is okay, they will release the loan. They will apply the loan to the property you are buying and the process is completed.