It can be hard to shop for a home without knowing how much you can afford. Mortgage preapproval lets you shop smarter and make stronger offers. The home-buying process begins in earnest when you contact a lender and get pre-approved for a mortgage. It is a nonbinding procedure, but it reveals how much a lender is willing to let you borrow and what kind of mortgage you may be eligible to receive. After you apply for preapproval, the lender will give you a pre-approval letter. Pre-approval is substantiated by financial documentation which is why a pre-approval letter from a lender is meaningful. The letter proves to a real estate agent and home seller that you are able to obtain financing and are ready to buy a home. Let’s look at what it means to get preapproved and how to get started.
Gather Documentation
You will need social security numbers, proof of income, banking information, and tax forms. Before applying, check your credit report as it could include incorrect data. You may want to pay off some of the existing debts before applying. Preapproval is an involved process that is best suited to borrowers who are ready and motivated to buy a home. Your pre-approval letter will likely expire in three months.
Credit Score
Your credit score is a very important consideration when you’re buying a house because it shows how you’ve handled debt in the past. And having a good credit score to buy a house makes the entire process easier and more affordable – the higher your credit score, the lower the mortgage interest rate you’ll qualify for. It’s recommended you have a credit score of 620 or higher when you apply for a conventional loan. If your score is below 620, lenders either won’t be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments. Usually, a credit score of 740 or above will enable you to qualify for the best mortgage rates. Get your score as high as possible before going on the homebuying journey. Request a copy of your credit reports. If you find delinquent accounts, work with creditors to resolve the issues before applying.
DTI Is Debt-To-Income Ratio
Your debt-to-income ratio (DTI)– how much you pay in debts each month compared to your gross monthly income – is a key factor when it comes to qualifying for a mortgage. Your DTI helps lenders gauge how much mortgage you can reasonably afford. Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI. If your DTI is prohibitively high, you may need an income-based repayment plan or pay down your debt more aggressively before you take on a mortgage.
Contact Several Lenders
Contact several different lenders — it’s helpful to get to know a few different loan officers. Different lenders also offer different kinds of loans. You want to explore your options in greater detail. Ask questions to help you get a better sense of what kind of loan might be the best choice for you. Because preapproval involves a hard inquiry, your credit score may experience a slight but temporary hit. When your application pertains to one loan, you’ll get dinged only one time rather than getting penalized by every lender. It is best to do your shopping within a 30-day period so that the same loan from several lenders will be seen on your credit report.
Preapproval Versus Prequalification
There’s not a lot of difference between a prequalification letter and a preapproval letter. While there are some legal distinctions, in practice both terms refer to a letter from a lender that says the lender is generally willing to lend to you, up to a certain amount based on certain assumptions. Prequalification is a good first step when you are not sure whether you are financially ready to buy a home. A mortgage prequalification is an informal evaluation of your finances. Preapproval is the next step if you get a thumbs up during prequalification. Unlike prequalification, preapproval is a more specific estimate of what you could borrow from your lender and requires documents such as your W2, recent pay stubs, bank statements, and tax returns. The lender will then use these documents to determine exactly how much you can be preapproved to borrow. If you know your finances are in good shape you may skip the prequalification process and start your preapproval process.
So, are you ready to buy a home? How far in advance should you apply for your preapproval letter? Usually, the approval letter is good for 30 days so do not do any financial moves after preapproval that could make you appear riskier to lenders. Do not apply for a new credit card, do not make any large purchases, or miss a loan or credit card payment.
Contact Dan (954-336-1922) for a free consultation!
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About Dan Campanella – Mortgage Specialist
Dan provides clients with years of proven experience and an abundance of financing options for their mortgages. His common sense approach and devotion to customer service is what sets him apart in the highly competitive mortgage industry. Dan prides himself on consistently delivering “referable services” to his clients, referral sources, and partners.