If you’re hoping to purchase your dream home and get your foot on the property ladder, you may already know that you should seek mortgage pre-approval or try to get pre-qualified.
In the home-buying world, mortgage prequalification can be comparable to a learner’s permit, with pre-approval letters equivalent to a driving license. A pre-qual letter provides insight into how large of a loan you may qualify. On the other hand, a pre-approval letter is a secure document granting you the mortgage amount.
The majority of sellers expect buyers to have a mortgage pre-approval letter. Once they’ve seen this letter, they’ll be happy to negotiate with potential buyers who have proof that they can obtain financing.
Potential buyers need to meet certain criteria and provide specific documentation before they qualify for pre-approval and obtain a pre-approved loan .
It’s time to understand exactly what terms like ‘pre-qualify mortgage’ and ‘home loan pre-approval’ mean and how they might help you. Remember, when you’re working toward a goal this significant, information is king.
Pre-Qualified vs. Pre-Approved
Before we discuss the differences between mortgage pre-approval and mortgage prequalification, we’re going to define both terms:
Prequalification is one of the first steps in your property buying journey. Home loan pre qualifications provide an estimate of how much you may be able to borrow, based on a credit check and information that you provide about your personal finances.
Prequalifications give first-time buyers the chance to learn about various mortgage options and work with their lender to find a finance option that matches their needs and goals.
Mortgage pre-approval is the closest you can get to proving your creditworthiness without signing a purchase contract for a property. Once you’ve completed your mortgage application and the lender has verified your information, they’ll perform a credit check. If you pass the credit check, you’ll be pre-approved. Next, the lender will send you a pre-approval letter. This is an official offer to lend you a certain amount of money, valid for 90 days.
Mortgage pre-approval letters are beneficial to potential homebuyers in several ways:
1. They allow you to discuss budgeting and loan options with a lender.
2. The lender will check your credit and highlight any problems that arise.
3. You’ll be able to discover the maximum amount that you can borrow in your current circumstances, helping you to set a price range for your dream home.
Final loan approval will be signed off once an appraisal is completed, and the loan can be applied to a property.
What You Need to Get Pre-Approved
If you’re wondering how to get pre-approved for a home loan , there are specific criteria you’ll need to meet to qualify.
Below we’ve provided a comprehensive list of all the items you’re required to submit to your mortgage lender to obtain your mortgage pre-approval letter.
A Copy of Your Drivers Licence
The majority of buyers will be asked to provide a copy of their driving license. This document is essential for fraud detection and buyer verification.
Verification of Your Social Security Number
It’s vital that you can verify your social security information to your lender by providing them with your social security number . Not only does this verify your identity and prevent fraud, but it also proves that you are a U.S. citizen or resident. Although lending is possible for foreign nationals, it’s a complicated process. Typically, buyers from outside the U.S. will have to make cash purchases on properties if they don’t already have a social security number.
If you currently own a property, whether you plan to sell it or rent it out, you’ll have to show your lender how much you pay monthly for the property.
This is part of the calculation to figure out your debt to income ratio (DTI). Leaders may also run a comprehensive market analysis on the property address to confirm that you have equity on the property. If you’re behind on payments for this house, you may be ineligible for another mortgage pre-approval .
Recent Bank Statements
Lenders will ask to see your recent bank statements to examine your credits and debts thoroughly. During this process, you’ll have to be as honest as possible, disclosing any personal or professional debts.
You’ll have to provide 30 days or two cycles worth of payslips to prove the amount you earn to the lender.
Homeowners Insurance Policy
You will have to provide a copy of your current homeowners insurance policy for each property you owe to your lender.
Property Tax Bill
If you own your own home, you’ll be asked to provide a copy of your property tax bill. Taxes are another factor used to determine your DTI.
To help calculate your income, mortgage lenders typically need: 2 years of personal tax returns. 2 years of business tax returns (if you own more than 25% of a business and receives partnership income)
Investment/Retirement Account Statements
If you have an investment or retirement account, you’ll need to show one or two monthly statements to your lender. You may not plan to use these funds towards your home, but they can help to prove that you’re qualified. Underwriters want you to confirm that you have a certain amount of cash in reserves.
Steps to Getting Pre-Approved
1. Find out your credit score: Before contacting a lender, find out where you stand regarding your credit rating. A score of 620 or more is recommended, and a higher score could guarantee better rates. If you want to be offered the best mortgage pre-approval rates, you’ll need a score of 760 or above.
2. Evaluate your credit history: Ask for copies of your credit reports, and be sure to dispute any errors.
3. Calculate your debt to income ratio: Your DTI is the percentage of your gross monthly income that pays off your debts. This includes student loans, car loans, credit cards, and any other outstanding debts. Use this free debt to income calculator to estimate your DTI. Be warned; lenders favor borrowers with a DTI of 36% or below.
4. Gather information about income and financial accounts: As mentioned above, this includes employment details, social security numbers, proof of income, bank details, and investment account information. As part of pre-approval, you’ll probably be asked to submit your W-2 tax form, 1099s, and a series of payslips. If you’re self-employed, you’ll be asked to submit the last two years’ tax returns.
5. Contact multiple lenders: Whereas some lenders make mortgage pre-approval a walk in the park, others have more complicated processes. Contacting several lenders will help you to find the right partner for your financial situation and could potentially save you money.
Why is Home Loan Pre-Approval Important?
To pre-qualify for a home loan , you’ll first need to be pre-approved.
Pre-approval is crucial as it assures you that you’re likely to be approved for a mortgage.
The pre-approval process can help you set your expectations and provide guidance on how much money you can spend on a property.
Here are some other advantages that pre-approval provides:
With a pre-approval, you’re not setting yourself up for disappointment by thinking you have a budget much bigger than the amount a lender will offer.
For most banks, a pre-approval is free and will be valid for up to 90 days.
Pre-approvals help you to shop with confidence and bid at property auctions or as
soon as your dream home comes onto the market.
Acquiring a pre-approved loan proves to your estate agent and potential sellers
that you’re a serious buyer.
Is prequalification enough?
No, prequalification is an estimate that lenders provide based upon information that you provide. Prequalification has no legal standing, which is crucial if you’re about to bid on a property. You’ll get a general idea of the size of the loan you may be able to borrow, but a credit report error can quickly quash any chances of a mortgage pre-approval.
Does pre-approval guarantee a mortgage?
Unfortunately, a pre-approved mortgage and a mortgage are two different things. If your financial position changes before bidding on a property, you may not get the same mortgage and term for which you acquired pre-approval. That is why it’s important to make sure you are not in a position of potential job loss, or simultaneously get into more debt such as opening up a new line of credit or purchasing a new car at the time that you get pre-approved. Nonetheless, a pre-approval demonstrates that you have credibility as a buyer, giving you a competitive edge.
Do you need pre-approval to look for a home?
Yes, unless you have a lot of spare cash, you probably don’t have the financial means to buy a home without pre-approval. Pre-approved mortgages reveal precisely how much you can invest in a home, impacting the type of home you can purchase. Additionally, you must know your price range before you can pursue your dream property to avoid disappointment and financial ruin.
Get Funding Fast
If you’re buying a new home, are worried about pre-approval, or are trying to get mortgage pre-qualification, we can get you pre-approved and funded for a loan—fast.
We’re here to make home buying and selling simple, affordable, and stress-free. Start your online home loan application and lock in low mortgage rates in minutes, helping you to save on monthly payments and sourcing cash to help remodel your home or clear high-interest debt.