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How to get preapproved for a mortgage
What you need to know to start your homebuying process on the right foot.
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.
How do I get preapproved for a mortgage?
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 FICO score before approving you for a mortgage. Aim to have a credit score of at least 620, while scores 740 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.
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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
According to the Consumer Financial Protection Bureau, 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 is generally 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
What lenders look for during the preapproval process can depend on the type of loan. For example, jumbo loans come with stricter prequalification requirements compared to conventional mortgages. In general, you can expect your lender to evaluate your:
- 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 history and verification. Lenders ask for verification of employment in the form of pay stubs and your most current W-2 forms. If you’re self-employed, you’ll need to provide at least two years of tax returns to verify your income.
- Residence history. Lenders may ask for proof of your residency for the past two years. This could be a letter from your landlord if you rent or proof of your current mortgage if you already own a home.
- Debt-to-income ratio. Most lenders won’t accept a debt-to-income (DTI) ratio of over 43%. If your DTI exceeds that amount, you’ll need a really high credit score, a large down payment and cash flow to show that you can afford the mortgage payments.
- Credit score. Although most lenders set their own credit score requirements, most require at least a 700 FICO score to qualify for a jumbo loan. You’ll need a 740 credit score to get the best rates.
- Loan-to-value ratio. A jumbo loan usually requires a loan-to-value (LTV) ratio of around 20% or about 20% for a down payment. The higher the down payment, the lower your LTV ratio.
Other documents you may need to provide
Most lenders will require these documents when you apply for a mortgage:
- 60 days of bank statements
- Schedule K-1 (Form 1065) for self-employed borrowers
- Income tax returns
- Driver’s license or US 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 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 two 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 1099 forms from clients or a Schedule K-1 (Form 1065).
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.
I’m preapproved. Now what?
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.
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 you get the best rate and terms available.
What is a mortgage underwriter?
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 to approve or deny your loan.
Should I get preapproved from more than one lender?
Yes. If you can, talk to two or three 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.
How long does it take to get preapproved for a mortgage?
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.
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