If you’re house-hunting and have a preapproval letter in-hand, you’re already a cut above others who might be looking at the same property. And getting preapproved for a mortgage isn’t as daunting as it might seem. The key is to know exactly what to expect and what documents you’ll need.
Homewise Mortgage
Homewise Mortgage
From
2.54 %APR
rate
Compare rates from 30+ lenders
Safe and simple application
Referral bonus available
Homewise Mortgage
Apply today and compare rates from 30+ banks and lenders, with rates ranging from 2.54% - 4.99%.
APR range: 2.54% - 4.99%
Lender type: Broker
Loans offered: Fixed & Variable rate, HELOC, Bridge, Second
Fees: Homewise is a broker and the service is always free for prime mortgages.
Min. credit score: "A" lenders: 620+, "B" lenders: 450+
To get the ball rolling with your homebuying process, start with these four steps:
Check your credit score. You should know where you stand before getting preapproval. Most lenders look at your credit score before approving you for a mortgage. Aim to have a credit score of at least 660, while scores 759 or higher usually qualify for the best rates. The minimum credit score to get a mortgage depends on the type of loan you’re getting.
Calculate your debt-to-income (DTI) ratio.Your DTI reveals if you can afford the monthly mortgage payment. Most lenders want your total debt, including your new home loan, to be no more than 43% of your total income. To find your DTI, divide your total amount of recurring monthly debt by your gross monthly income. Note that recurring monthly debt typically only includes monthly payments that show up on a credit report, including credit cards, car payments and student loans.
Find a lender. Banks, credit unions and online financial institutions are the most common types of lenders. Talk to more than one so you can compare rates, fees and loan options.
Get preapproved. Fill out some personal information and provide all necessary documents and information to your lender.
What is a mortgage preapproval?
A mortgage preapproval is a letter from a lender stating a specific monetary amount that they are willing to lend you for the purchase of your home. This is based on a number of factors, including your income, debt and credit score.
A mortgage preapproval is not a promise that you’ll get a loan. It’s a statement that your lender has evaluated your finances and is willing to finance your purchase.
Difference between prequalification and preapproval
The terms “prequalification” and “preapproval” are often used interchangeably. It really depends on how your lender defines the first step in its mortgage process. Both prequalification and preapproval provide useful information about how much you may be able to borrow.
Prequalification generally refers to an informal evaluation of your finances. You provide the lender with information about your income, assets, credit and debts. The lender doesn’t verify this information, but uses it to estimate whether you can qualify for a mortgage and approximately how much you can borrow. If you’re confident about your finances, you might skip prequalification and go straight for a preapproval.
Preapproval is much more involved and requires documentation. Unlike prequalification, lenders verify your income, assets and liabilities during preapproval. Lenders will also pull your credit, which may temporarily drop your credit score. But preapproval typically holds more weight to sellers and realtors.
Benefits of getting preapproved
Getting preapproved is beneficial for several reasons. Most importantly, you’ll have an accurate idea of how much you can actually afford to spend on a new property. Having a preapproval letter can also give you an advantage over other buyers.
Bringing a preapproval letter to a buyer or real estate agent shows that you’re prepared and serious about making a purchase. It proves that you can get a loan for at least the asking price of the house or property.
Requirements to get preapproved
Here’s what lenders look for during the preapproval process:
Proof of income. Lenders want to make sure you have enough income to afford a new monthly mortgage payment.
Proof of assets. If you have any assets like stocks, bonds, savings accounts, retirement accounts or equity in another property, your lender will want to see the documentation for them.
Employment verification. Lenders ask for verification of employment in the form of pay stubs and your most current Notices of Assessment. If you’re self-employed, you’ll need to provide at least 2 years of tax returns to verify your income.
Residence history. Lenders may ask for proof of your residency for the past 2 years. This could be a letter from your landlord if you rent, or proof of your current mortgage if you already own a home.
Other documents you may need to provide
Most lenders will require these documents when you apply for a mortgage:
3-6 months of bank statements
T1, T4 or T4A statements of income
Notices of Assessment from the most recent income tax returns
A valid driver’s license or Canadian passport
Divorce papers to use alimony or child support as qualifying income
Gift letter, if funding your down payment with a financial gift from a relative
Third-party bank statements, if someone else pays for a considerable amount of your debt, such as parents paying for your student loans
What if I’m self-employed?
Self-employed borrowers are treated a bit differently than other borrowers. You’ll need to have at least 2 years of tax returns that show your business income. If you’ve only been self-employed for one year, most lenders won’t preapprove you unless you have significant alternative sources of income, a cosigner or a spouse who could put the home in his or her name.
You’ll also need to show proper documentation, such as T1 tax returns and T4A forms.
Keep in mind that any business expenses that you write off for tax purposes are deducted from your total income, which can put you at a disadvantage when applying for a mortgage. While you should take advantage of eligible tax write-offs for your business, you may want to pick and choose what you write off if you know you’ll be applying for a mortgage. Speak with a tax professional before making any decisions.
Once you’re preapproved, keep a close eye on your finances until the entire mortgage process is complete. Any changes to your financial situation from the time you’re preapproved to the date of your closing can impact your ability to finalize the loan.
Avoid changes in income. Don’t quit or change jobs in this timeframe.
Avoid accumulating new debt. Now is not the time to buy a new car or finance living room furniture.
Make payments on time. Late or missed payments affect your credit score, and a lower credit score might affect your mortgage eligibility.
Stay in touch with your lender. Keep your lender in the loop when you’re ready to make an offer on a property, especially if any numbers have changed since you last spoke.
Compare mortgage providers
Bottom Line
Getting preapproved for a mortgage is a helpful first step in the home buying process and can help you edge out the competition. But it’s important to do your due diligence ahead of time to help make the process as smooth as possible and ensure that you get the best rate and terms available.
Frequently asked questions
Mortgage underwriters make sure that all of the loan requirements are met and that the property appraisal is accurate to assess the overall risk. Underwriters decide whether to approve or deny your loan.
Yes. If you can, talk to 2 or 3 lenders, so you can compare their interest rates and loan options. But it’s best to apply within the same 45-day window so all credit checks count as one inquiry on your report, which can protect your score from dropping too much.
The sooner you get all the necessary documents to your lender, the sooner you’ll get your preapproval letter. This process can take anywhere from a few minutes to a few days, depending on your situation and how quickly you can supply the requested documents.
Gabrielle Pastorek is a staff writer at Finder, helping readers to round up the best deals, coupons, retailers, products and services to make sound financial decisions. She's written more than 800 articles on the site and is a quoted expert in Best Company and DealNews. She earned an MFA from the University of Pittsburgh, with essays and short stories published in The Collagist, Blue Monday Review, Blotterature and others. When she’s not writing, Gabrielle can be found out in the barn with her horse, Lucy.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Advertiser Disclosure
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
