How can I get pre-approved for a home loan?
Getting pre-approved for a home loan is an important part of buying a home. But many buyers ignore this vital step.
A home loan pre-approval not only gets the ball rolling on your mortgage application, it also gives you a tool to use when bidding on a home. Having a pre-approved home loan shows sellers you're serious about buying and can qualify for a mortgage. That gives you an advantage when bidding against buyers who are not pre-approved.
It also lets you know exactly how much you can be allowed to borrow, which helps identify the price range of homes you can qualify for.
A mortgage loan pre-approval is a more advanced step than merely prequalifying for a mortgage. In prequalifying, you simply provide a lender with some basic information about your finances and credit, and the lender gives you an estimate of how much you can borrow.
With a home loan pre-approval, you provide more detailed information that allows a lender to verify that you can be approved for a mortgage. Once you're pre-approved, the lender provides you with a letter that states you've been pre-approved for a mortgage up to certain dollar amount and can be shown to home sellers as evidence of your ability to buy
Where to get pre-approved for a home loan?
You get a home loan pre-approval at the same place you'd get a mortgage – at any mortgage lender. Many lenders will allow you to do a mortgage pre-approval online these days – some will even allow you to do almost the entire loan process that way.
An online mortgage pre-approval gives you the convenience of filling out your application and submitting your documentation electronically, without making a trip to the bank or a lending office.
An online mortgage pre-approval or loan application also makes it easy to submit additional information, if needed, without making an extra trip. Often, the only part you have to do in person is conduct the actual closing of the loan in the office of an attorney or title agency.
You shouldn't have to pay any fees to start the home loan pre-approval process or to obtain a pre-approval letter. While there are always exceptions, in most cases you should not have to pay any fees until you actually close on the loan.
How to get pre-approved for a mortgage loan
The first step in the mortgage pre-approval process is to find a lender. Shop around, seek rate quotes from a number of lenders and when you've found one you like, seek a loan pre-approval from them.
The home loan pre-approval process is very much like actually applying for a mortgage itself. You go through most of the same steps, short of signing on the dotted line. You fill out a mortgage application, provide documentation of your income, assets and debt load, and the lender pulls your credit score.
You can often provide this information electronically or authorize the lender to obtain it for you, which reduces the documents you need to physically provide. If seeking a mortgage pre-approval online, you'll likely want to submit your documents electronically anyway, though you can also mail paper copies if you choose.
Here's a rundown of the basic documentation lenders want to see. You only need to provide the information that applies to you. So if you don't have any investment income, for example, you don't need to document that.
You'll need your proof of income, which will generally include whichever of the following apply in your case:
- Last 30 days of pay stubs
- W-2 or I-9 forms from the past two years
- Last two years of tax return
- Records of commissions and bonuses paid over past two years
- Child support payments
- Investment income
- Rental income
- Pension or retirement income
Requirements for business owners or self-employed individuals tend to be a bit more complicated. They may be asked to provide a profit-and-loss statement, balance sheet or various other documents.
You'll also need to document your financial assets, including proof of your ability to be able to afford the down payment you plan to make. These would include:
- Two month's bank account statements (checking and saving) for the past two months
- Two months of statements for investment accounts, CDs, IRAs, stocks, bonds mutual funds, etc.
- List of real estate holdings, including address and value. If mortgaged, need lender name, outstanding balance and monthly payment.
- Other valuable assets like gold, collectable art, etc. that can be quickly converted to cash.
Next, you'll need a list of all your debts, including the outstanding balance and the minimum you must pay each month for each. These include:
- Credit cards
- Auto loans
- Student loans
- Alimony payments
- Child support
- Any other long-term debt paid in installments
Don't include ongoing costs for services that are not debt, like monthly fees for Internet, cable/satellite TV, utilities, etc.
Finally, your lender will want to pull your credit score. You don't have to provide this yourself; you simply authorize your lender to obtain it. However, it's a good idea to check it beforehand so you know where you stand going into the process.
Many credit card companies and banks now provide their customers with their updated FICO credit score free of charge as part of their services. If yours do not do that, you may need to order it directly from one of the three credit reporting agencies – Equifax, Experian or Transunion. Note that while you're legally entitled to a free copy of your credit report from each of these once a year, you may have to pay to get your actual FICO credit score, which is the one mortgage lenders generally use.
Next steps in the home loan pre-approval process
Once you're pre-approved, you're given a conditional approval to borrow up to a certain amount of money and a letter stating that fact. The conditional approval is generally good for 60-90 days.
Once you find a home you like and complete a sales contract, you provide a copy of the contract to your lender and signal them to go ahead with processing the loan application.
Although you've filled out a mortgage application, a home loan pre-approval doesn't commit you to taking out a mortgage. That doesn't happen until you have a signed sales agreement in hand and authorize the lender to process the application. You can always change your mind or even go with a different lender up until then.
Likewise, a pre-approval doesn't absolutely guarantee you're getting approved for a home loan. You could still be turned down if the home you chose does not appraise for a high enough value or if problems are discovered with your application during the formal approval process, known as underwriting.
Most of the time this doesn't mean your application has been flat-out rejected, but that you'll be asked to provide some additional documentation or perhaps a larger down payment in the case of a low appraisal.
Though they aren't mandatory, both prequalifying and pre-approval are important steps in qualifying for a mortgage and buying a home. Both should be part of your plans for buying a home.
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