If you’re in the market for a new home, obtaining a mortgage preapproval is a crucial step in the process. A mortgage preapproval provides valuable information about the amount you can potentially borrow to purchase a home, enhances your appeal to sellers, and identifies any potential issues that may impact your ability to secure a loan. To get pre-approval, you must provide your lender with different documents to confirm your personal, employment, and financial details.
Understanding Mortgage Preapproval and How to Obtain One
A mortgage preapproval is a letter from a lender indicating their potential willingness to lend you a specific amount of money for purchasing a home. Obtaining a preapproval for a mortgage is an essential initial step in the home-buying process, as many sellers require a pre-approval letter before accepting an offer on their property.
Fortunately, the process of applying for preapproval is relatively quick and straightforward. Let’s delve into the steps you need to take and the benefits of obtaining a mortgage preapproval during the home-buying journey.
What is Mortgage Preapproval?
A mortgage pre-approval is a conditional approval for a home loan provided by a lender in the form of a pre-approval letter. It informs sellers that you are likely to be approved for a certain amount of financing based on the information you have provided in your preapproval application.
However, it is essential to note that preapproval does not guarantee final loan approval, and the terms of the loan may change after you submit a complete and formal mortgage application.
How Long Does It Take to Get Preapproved for a Mortgage?
Depending on the lender, obtaining a mortgage preapproval takes a different amount of time. The duration of the process can range from a few minutes for a simple preapproval to 24 hours, 10 days, or longer. If you’re strapped for time, make sure to ask each lender you’re considering how long the preapproval process typically takes.
Mortgage Preapproval vs. Mortgage Prequalification
It’s essential to grasp the distinction between mortgage preapproval and prequalification.
Prequalification: Prequalification gives you a rough idea of how much you might be able to borrow based on the financial data you provide. It does not entail a comprehensive investigation of your financial situation, employment history, or assets. A credit check is necessary for prequalification.
Preapproval: The preapproval process is based on the verified financial data that your lender has provided. Your credit history, income, employment, and other pertinent aspects will all be thoroughly evaluated. A credit check and the submission of financial supporting documentation are needed for preapproval.
Prequalification and preapproval differ primarily in the degree of examination given to your information. Preapproval is given after the lender has confirmed the accuracy of the information, whereas prequalification is an estimate based on the information provided.
Is Mortgage Preapproval Worth it?
Obtaining a mortgage preapproval offers several advantages. Firstly, it provides clarity regarding the amount you can borrow, enabling you to focus your home search on properties within your price range. It’s important to note that while you may be preapproved for a specific amount, it is not necessary to borrow the maximum. Lenders often base their calculations on your gross monthly income rather than your net income. Therefore, it is crucial to review your budget and ensure that you are comfortable with the loan amount. Relying solely on your lender’s assessment of affordability is not advisable.
Secondly, the preapproval process can uncover any potential issues that may hinder your mortgage approval. Addressing these issues before becoming emotionally invested in a particular property can save you from disappointment and wasted effort.
Lastly, a mortgage preapproval demonstrates to sellers that you have the financial capacity to support your offer, making your offer more competitive. It also signals to real estate agents, who work on commission, that investing time in your transaction is likely to yield results. Additionally, it alerts lenders that you are a knowledgeable borrower who may soon be seeking a mortgage loan. In summary, obtaining a mortgage preapproval showcases your seriousness as a homebuyer.
Factors Affecting Mortgage Preapproval
Several factors influence the mortgage pre-approval process. Knowing these factors can assist you in navigating the process with greater effectiveness.
Debt-to-Income Ratio (DTI)
Your DTI ratio is calculated by dividing your total debt payments by your gross monthly income. A high DTI ratio indicates a potentially excessive financial burden. Most lenders prefer a DTI ratio of 43% or less.
Down Payment
The upfront amount you contribute toward the mortgage, known as the down payment, affects the terms of your loan. Typically, a down payment between 10% and 20% results in better loan terms. For conventional loans, a down payment of at least 20% can help you avoid Private Mortgage Insurance (PMI) payments.
Credit
Your credit scores and history play a significant role in a lender’s assessment of your eligibility for a mortgage and the interest rate you will receive.
Income
Lenders evaluate your income to determine your ability to afford the mortgage payment. Generally, lenders prefer that your housing costs do not exceed 28% of your gross income.
Employment History
Lenders assess your employment history, including any gaps, commission-based income, or recent job changes, to gauge the stability of your income.
How to Obtain Mortgage Preapproval
Applying for mortgage preapproval involves straightforward steps and the submission of the necessary documentation. Each lender may have slightly different requirements, but in general, they will review your credit history, income, assets, and debts before granting preapproval.
Here’s what you need to do:
Gather the Required documents.
During the preapproval process, lenders will check your identity, credit history, employment history, income, and financial assets to verify them. You will likely need to complete a uniform residential loan application (often referred to as a 1003 form) that collects personal, financial, and loan-related information. The application will request details regarding your bank accounts, retirement accounts, other assets, owned properties, income, employment, employer contact information, debts, and liabilities. Lenders will also conduct a hard credit check and may request additional documents such as pay stubs, tax returns, or bank statements based on your individual circumstances.
Obtain Quotes from Multiple lenders.
Just as you aim to find the best deal on the house you purchase, it’s equally important to find the best deal on your home loan. Different lenders have varying guidelines and interest rate options, which can significantly impact your monthly payments. Obtaining preapproval from multiple lenders allows you to compare offers and choose the one that best meets your needs. Conduct thorough research on potential lenders and loan officers, as the experience and knowledge of the professionals handling your application can vary. Once you have selected lenders, provide them with the necessary information to complete the preapproval application. Note that until an underwriter reviews your application, you have not received full pre-approval. Therefore, be sure to inquire about the status of your application during the process.
Timing of Preapproval
Preapproval letters typically have a validity period of 30 to 90 days. Considering the relatively short duration, it is advisable to obtain preapproval letters when you are ready to seriously begin your home search. Keep in mind that pre-approval is conditional approval, and your financial situation can impact the final mortgage approval. Accumulating additional debt, changing jobs, or depleting savings can result in the denial of your loan application.
Choose a Lender
After making an offer on a house, ask your potential lenders for official loan estimates. They will give you this estimate within 3 business days of receiving your application. The document will outline estimates for your interest rate, monthly payment, closing costs, taxes, insurance, and any penalty fees. Review and compare these estimates to select the lender that best suits your requirements, and proceed to complete the application process with them.
Preapproval vs. Approval
It’s essential to differentiate between preapproval and final loan approval. Preapproval represents the first step you take when you are ready to purchase a home. It provides an indication of the maximum amount you can borrow. However, preapproval is not a guaranteed loan offer, as it is based on conditional approval. Final loan approval, the last stage of the mortgage process, occurs when you receive clearance to close on your mortgage. At this point, you become legally responsible for making monthly mortgage payments.
Conclusion
Obtaining a mortgage preapproval offers numerous benefits for potential homebuyers. If you are unable to secure preapproval, you can address the issues that hindered your application. This may involve paying down debt to improve your debt-to-income ratio, saving for a larger down payment, or resolving inaccuracies on your credit reports.
Engaging in this preparatory work can yield significant rewards. Having a mortgage preapproval letter in hand distinguishes you from other prospective buyers and demonstrates your seriousness and financial readiness. By following the steps outlined above, you can navigate the preapproval process with confidence and enhance your chances of securing a mortgage that aligns with your needs and goals.