How to Get Pre-approved for a Mortgage
How to Get Pre-approved for a Mortgage

How to Get Pre-approved for a Mortgage

As you search for a home, getting pre-approved for a mortgage can be an crucial mistreat to take. Consulting with a lender and obtaining a pre-approval letter provides you with the opportunity to discuss loanword options and budgeting with the lender ; this dance step can serve to clarify your total house-hunting budget and the monthly mortgage payment that you can afford .

As a borrower, it ’ s crucial to know what a mortgage pre-approval does ( and doesn ’ t do ), and how to boost your chances of getting one .

Key Takeaways

  • Going through the pre-approval process with several lenders allows a homebuyer to shop mortgage rates and find the best deal.
  • A seller often wants to see a mortgage pre-approval letter and, in some cases, proof of funds to show that a buyer is serious.
  • The first step is filling out a mortgage application and supplying your Social Security number so that the lender can do a credit check on you.
  • You’ll also need to provide extensive documentation of job history, assets and liabilities, income tax returns, and more. Self-employed buyers may need to provide additional documentation.
  • After reviewing your application, a lender will offer pre-approval, offer pre-approval with conditions, or deny pre-approval.

Pre-approval Is a ‘ Physical Exam ’ for Your Finances

Before lenders decide to pre-approve you for a mortgage, they will look at several key factors :

  • Debt-to-income (DTI) ratio
  • Loan-to-value (LTV) ratio
  • Credit history
  • FICO score
  • Income
  • Employment history

Factors Affecting Mortage Pre-Approval
Investopedia / Ellen Lindner
think of a mortgage pre-approval as a physical examination for your finances. Lenders will likely poke and prod into all corners of your fiscal liveliness as a way of trying to ensure that you ’ ll repay your mortgage .

Pre-qualification vs. Pre-approval

You ’ ve probable heard the terminus “ pre-qualification ” used interchangeably with pre-approval, but they are not the same. With a pre-qualification, you provide an overview of your finances, income, and debts to a mortgage lender. The mortgage lender then gives you an estimated lend come .

In this way, a mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on a home. however, the lender doesn ’ t pull your credit reports or verify your fiscal information. accordingly, pre-qualification is a helpful starting distributor point to determine what you can afford but carries no slant when you make offers .

On the other hand, a pre-approval involves filling out a mortgage application and providing your Social Security act thus that a lender can do a hard citation check. A hard credit check is triggered when you apply for a mortgage. For this summons, a lender pulls your credit report and credit score to assess your creditworthiness before deciding to lend you money. These checks are recorded on your recognition report and can impact your recognition score .

By contrast, a balmy credit check occurs when you pull your credit yourself, or when a credit card party or lender pre-approves you for an offer without your asking. soft credit checks do not impact your credit grade .

besides, you ’ ll list all of your bank account information, assets, debts, income and employment history, past addresses, and other critical details for a lender to verify. The reason for this is that, above all, a lender wants to ensure that you can repay your lend. Lenders besides use the provide information to calculate your DTI ratio and loan-to-value ( LTV ) ratio, which are essential factors in determining the interest rate and ideal loanword type .

All of this makes a pre-approval much more valuable than a pre-qualification. It means that the lender has checked your credit and verified the documentation to approve a specific loan amount. Final lend approval occurs when you have an appraisal done and the loan is applied to a property .

When to Get a Pre-approval

mortgage pre-approval letters are typically valid for 60 to 90 days. Lenders put an passing date on these letters because your finances and credit profile could change. When a pre-approval expires, you ’ ll have to fill out a raw mortgage application and resign update paperwork to get another one .

If you ’ re just starting to think about buying a family and suspect that you might have some difficulty getting a mortgage, going through the pre-approval procedure can help you identify credit issues—and potentially give you time to address them .

Seeking pre-approval six months to one class in advance of a serious home search puts you in a stronger place to improve your overall credit profile. You ’ ll besides have more time to save money for a gloomy payment and conclusion costs .

When you are cook to make offers, a seller frequently wants to see a mortgage pre-approval and, in some cases, proof of funds to show that you ’ re a serious buyer. In many hot housing markets, sellers have an advantage because of intense buyer demand and a restrict number of homes for sale ; they may be less likely to consider offers without pre-approval letters .

What You Need to Get Pre-Approved for a Mortgage
Emily Roberts © Investopedia, 2019 .

The Pre-approval process

Applying for a mortgage can be exciting, nerve-racking, and confusing. Some on-line lenders can pre-approve you within hours, while early lenders can take several days. The timeline depends on the lender and the complexity of your finances .

For starters, you ’ ll satiate out a mortgage lotion. You ’ ll include your identify information, arsenic well as your Social Security total, so that the lender can pull your credit. Although mortgage citation checks count as a unvoiced question on your credit reports—and may impact your recognition score—if you ’ re shop multiple lenders in a short time frame ( normally 45 days for newer FICO scoring models ), the combined credit checks count as a single inquiry .

here ’ s a sample of a uniform mortgage lotion. If you ’ re applying with a spouse or other co-borrower whose income you need to qualify for the mortgage, both applicants will need to list fiscal and employment information. There are eight independent sections of a mortgage application .

1. type of Mortgage and Terms of the Loan

The specific loanword intersection for which you ’ re apply ; the lend measure ; terms, such as duration of clock time to repay the loanword ( amortization ) ; and the interest rate .

2. property data and Purpose of the Loan

The address ; legal description of the property ; year built ; whether the loan is for purchase, refinance, or newfangled construction ; and the mean type of residency : primary coil, junior-grade, or investment .

3. Borrower information

Your identifying information, including full name, date of birth, Social Security number, years of school attended, marital status, number of dependents, and address history .

4. employment data

The mention and contact information of current and former employers ( if you ’ ve been at your current status for less than two years ), dates of employment, title, and monthly income .

5. monthly Income and Combined Housing Expense information

A list of your base monthly income, arsenic good as overtime, bonuses, commissions, net lease income ( if applicable ), dividends or interest, and other types of monthly income, such as child support or alimony .

besides, you ’ ll need an account of your monthly combined housing expenses, including rent or mortgage payments, homeowners and mortgage indemnity, place taxes, and homeowners association dues .

6. Assets and Liabilities

A list of all bank and accredit union check and savings accounts with current balance amounts, arsenic well as biography policy, stocks, bonds, retirement savings, and common fund accounts and corresponding values. You need bank statements and investment report statements to prove that you have funds for the depressed requital and close costs, american samoa well as cash reserves .

You ’ ll besides need to list all liabilities, which include revolving charge accounts, alimony, child support, car loans, student loans, and any other outstanding debts .

7. Details of the transaction

An overview of the key transaction details, including leverage price, loanword sum, the value of improvements/repairs, estimated close costs, buyer-paid discounts, and mortgage indemnity ( if applicable ). ( The lender will fill in much of this data. )

8. Declarations

An armory of any judgments, liens, past bankruptcies or foreclosures, pending lawsuits, or delinquent debts. You ’ ll besides be asked to state whether you ’ re a U.S. citizen or permanent house physician and whether you intend to use the home as your primary coil residency .

Most home sellers will be more bequeath to negotiate with those who have proof that they can obtain finance.

What Happens future ?

A lender is required by law to provide you with a three-page document called a loanword appraisal within three business days of receiving your completed mortgage application. This paperwork notes whether the mortgage has been pre-approved and outlines the loanword come, terms and type of mortgage, interest rate, estimated interest and payments, estimated closure costs ( including any lender fees ), an estimate of property taxes and homeowner ’ randomness policy, and any special lend features ( such as balloon payments or an early on prepayment penalty ). It besides specifies a maximum loan amount—based on your fiscal picture—to avail you narrow down your home-buying budget .

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If you ’ ra pre-approved for a mortgage, your loanword file will finally transfer to a loanword insurance company who will verify your documentation against your mortgage application. The insurance company will besides ensure that you meet the borrower guidelines for the particular loanword program for which you ’ rhenium apply .

documentation Needs

After submitting your mortgage lotion, you ’ ll indigence to gather a number of documents to verify your information. preparation and constitution on your end will help the process go more smoothly. here ’ s a list of documents that you need to present to be pre-approved or to secure final loan blessing before close :

  • 60 days of bank statements
  • 30 days of pay stubs
  • W-2 tax returns from the previous two years
  • Schedule K-1 (Form 1065) for self-employed borrowers
  • Income tax returns
  • Asset account statements (retirement savings, stocks, bonds, mutual funds, etc.)
  • Driver’s license or U.S. 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)

Down Payment Gifts

many loanword products allow borrowers to use a fiscal giving from a relative toward the down requital. If you go this route, a lender will ask you to complete a standard giving letter in which you and the endowment donor allege that the endowment international relations and security network ’ t a third-party loan with an anticipation of refund .

otherwise, such an placement could increase your DTI ratio and impact your final loan approval. additionally, both you and the donor will have to provide bank statements to source the transfer of cash funds from one account to another .

Factors Impacting Pre-approval

If you want to maximize your chances of getting a mortgage pre-approval, you need to know which factors lenders evaluate in your fiscal profile. They include :

DTI Ratio

Your DTI ratio measures all of your monthly debts relative to your monthly income. Lenders add up debts such as car loans, student loans, revolving charge accounts, and other lines of credit—plus the new mortgage payment—and then divide the summarize by your gross monthly income to get a share .

Depending on the loan type, borrowers should maintain a DTI ratio at ( or below ) 43 % of their gross monthly income to qualify for a mortgage. The higher your DTI ratio, the more risk you pose to lenders ; you could be more probably to struggle to repay your loanword on top of debt payments .

Having a lower DTI proportion can qualify you for a more competitive interest rate. Before you buy a home, pay down angstrom much debt as possible. You will not lone lower your DTI ratio but besides show lenders that you can manage debt responsibly and pay bills on time .

LTV Ratio

Another key metric unit that lenders use to evaluate you for a mortgage is your LTV proportion, which is calculated by dividing the loan amount by the home ’ s measure. A property appraisal determines the place ’ second measure, which might be lower or higher than the seller ’ s asking price. The LTV proportion formula is where your down payment comes into play .

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A down payment is an up-front summarize of money that you pay, in cash, to the seller at the closing table. The higher your down payment, the lower your loan amount—and, as a result, the lower your LTV ratio. If you put down less than 20 % percentage, then you might be required to pay for private mortgage insurance ( PMI ). It ’ s a type of policy coverage that protects lenders if you fail to repay your mortgage. To lower your LTV ratio, you either need to put down more money or buy a less expensive house .

Credit History and Score

Lenders will pull your recognition reports from the three main reporting agency : Equifax, Experian, and TransUnion. They ’ ll count for your payment history and whether or not you pay bills on time, how many and what type of credit rating lines you have open, and the duration of clock that you ’ ve had those accounts .

In addition to positive payment history, lenders analyze how much of your available accredit you actively use, besides known as recognition utilization. Maintaining a credit utilization rate at ( or below ) 30 % helps boost your credit score. It besides shows lenders a responsible, reproducible pattern of paying your bills and managing debt wisely. All of these items account for your FICO score, a credit score model used by many types of lenders ( including mortgage lenders ) .

If you have not opened credit cards or any traditional lines of credit—such as a car loanword or student loan—then you might have trouble getting a mortgage pre-approval. You can build your credit by opening a starter credit card with a low credit argumentation terminus ad quem and paying off your bill each calendar month. It could take up to six months for your payment action to be reflected in your credit score. It ’ second important to be affected role as you build your credit profile .

Most lenders require a FICO score of 620 or higher to approve a conventional lend, and some even require that score for a Federal Housing Administration ( FHA ) loanword. Lenders typically reserve the lowest interest rates for customers with a credit score of 760 or higher .

FHA guidelines allow approved borrowers with a grudge of 580 or higher to pay deoxyadenosine monophosphate short as 3.5 % down. Those with lower scores must make a larger down payment. Lenders will frequently work with borrowers with a low, or moderately low, credit score and suggest ways to improve their score .

The chart below shows your monthly principal and interest ( PI ) requital on a 30-year situate interest rate mortgage based on a range of FICO scores for three coarse loanword amounts. ( Since interest rates change much, use this FICO Loan Savings Calculator to double-check scores and rates. ) Note that on a $ 250,000 loanword, an individual with a FICO score in the lowest ( 620–639 ) range would pay $ 1,226 per calendar month, while a homeowner in the highest ( 760–850 ) compass would pay just $ 1,006 ( a difference of $ 2,640 per year ) .

Estimated Monthly Payments Based on Credit Score Ranges
FICO score range 620–639 640–659 660–679 680–699 700–759 760–850
Interest rate 4.227% 3.681% 3.251% 3.037% 2.860% 2.638%
$350,000 loan $1,717 $1,607 $1,523 $1,483 $1,449 $1,408
$250,000 loan $1,226 $1,148 $1,088 $1,059 $1,035 $1,006
$150,000 loan $736 $689 $653 $635 $621 $603

At today ’ s rates, and over the 30 years of that $ 250,000 loanword, an individual with a FICO score in the 620–639 roll would pay approximately $ 191,535 in concern, while a homeowner in the 760–850 compass would pay $ 112,100 ( a dispute of more than $ 79,000 in sum ) .

employment and Income History

When you apply for a mortgage, lenders go to capital lengths to ensure that you earn a solid income and have stable employment. That ’ randomness why lenders request two years ’ worth of W-2 tax forms and contact information for your employer. basically, lenders want to ensure that you can handle the total fiscal burden of a new mortgage .

You ’ ll besides be asked to provide wage information, so a lender has tell that you earn adequate money to afford a mortgage requital and related monthly house expenses. You ’ ll besides have to provide 60 days ( and possibly more, if you ’ re freelance ) of bank statements to show that you have adequate cash in handwriting for a down payment and closing costs .

loanword Types

Loans can be classified in two ways : conforming and nonconforming. A conform lend adheres to sealed standards set forth by government-sponsored enterprise ( Fannie Mae and Freddie Mac ) guidelines. elephantine loans are the lone type of loanword that is nonconforming .

Some types of loans, such as HomeReady ( offered by Fannie Mae ) and Home Possible ( offered by Freddie Mac ), are designed for low-income or first-time homebuyers. U.S. Department of Veterans Affairs ( VA ) loans, which typically require no down payment, are for U.S. veterans, service members, and eligible spouses .

The graph below lists park loan types and the basic ( and wide-ranging ) requirements for each. In the DTI ratio column, where two figures appear, the first refers to housing-only debt and the second number refers to all debt. Under PMI/MIP ( for mortgage policy premium ) /Fee, two numbers separated by a slash ( / ) indicate an up-front fee followed by an annual tip ( paid monthly ). All mortgage loans have extra requirements not listed here .

Requirements for Common Loan Types
Mortgage Minimum Down FICO DTI Ratio PMI/MIP/Fee Additional Requirements
  Conventional 97 3% 620 43% 0.15%–1.95%    
  Conventional 5%–20% 620 43% 0.15%–1.95%    
Jumbo 5%–20% 720 43% None Nonconforming for homes more than $548,250 ($647,200 beginning in 2022)
FHA (96.5%) 3.5% 580 31%/43% 1.75%/0.85%    
FHA (90%) 10% 500 31%/43% 1.75%/0.85%    
FHA 203(k) 3.5% 580 31%/43% 1.75%/0.85% Buy plus rehab
VA 0% None 41% 2.3% or 3.6%* VA certificate of eligibility
USDA 0% None 29%/41% 1%/0.50% Rural areas only
HomeReady 3% 620 43% 1.50% Low income only
Home Possible 3% 660 45% 1.50% Low income only

*The VA fund tip is 2.3 % for your first gear lend and 3.6 % for subsequent loans .

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freelance Borrowers

If you ’ re a freelance borrower, you might be asked to provide extra documents to show a coherent income and work history of at least two years. Some documents requested may include a profit and loss statement, a clientele license, your accountant ’ sulfur signed statement, federal tax returns, balance sheets, and trust statements for previous years ( the accurate sum of time depends on the lender ) .

typically, freelance borrowers need to produce tax returns from the two most recent years, in addition to all appropriate schedules .

Factors that go into approving a mortgage for a freelance borrower include the constancy of the borrower ’ s income, the placement and nature of the borrower ’ s business, the demand for the product or service offered by the business, the fiscal lastingness of the clientele, and the ability of the business to continue generating and distributing sufficient income to enable the borrower to make the payments on the mortgage .

If your position makes it unmanageable to get a traditional mortgage, there are two options geared specifically for freelance borrowers .

1. Stated Income or Stated Asset Mortgage

This type of mortgage is based on the income that you report to the lender without formal confirmation. submit income loans are sometimes besides called low-documentation loans because lenders will verify the sources of your income preferably than the actual total .

freelance people should be prepared to provide a number of their late clients and any other sources of cash stream, such as income-producing investments. The bank may besides want a transcript of Internal Revenue Service ( IRS ) form 4506 or 8821 .

form 4506 is used to request a copy of your tax render immediately from the IRS, thus preventing you from submitting falsified returns to the lender. It costs $ 43 per render, but you may be able to request Form 4506-T for free. form 8821 authorizes your lender to go to an IRS office and examine the forms you designate for the years you specify, dislodge of blame .

2. No-Documentation loan

In this character of loanword, the lender will not seek to verify any of your income information, which may be a good option if your tax returns show a business loss or a very low profit. Because it is riskier for the bank to lend money to person with an unverified income, expect your mortgage interest pace to be higher for a no-documentation loanword versus a full-documentation loan .

Low- and no-documentation loans are called Alt-A mortgages ; they fall between prime and subprime loans in terms of sake rates .

Pre-approval Decisions

After reviewing your mortgage application, a lender will normally give you one of three decisions : pre-approved, denied outright, or pre-approved with conditions. In the third scenario, you might need to provide extra software documentation or lower your DTI proportion by paying down some recognition accounts to satisfy the lender ’ s conditions. If you are denied outright, the lender should explain precisely why and provide you with resources on how to best tackle the problems .

mortgage lend discrimination is illegal. If you think that you ’ ve been discriminated against based on race, religion, sexual activity, marital condition, function of public aid, national origin, disability, or old age, there are steps that you can take. One such mistreat is to file a report with the Consumer Financial Protection Bureau ( CFPB ) or the U.S. Department of Housing and Urban Development ( HUD ). In many cases, borrowers need to work on boosting their recognition score and ironing out a patched payment history. Once you know what you need to address, you can take the fourth dimension and campaign to improve your recognition and fiscal health to get a better mortgage cover when you ’ re ready to embark on your home search. Doing so can save you significant money on mortgage pricing and ensure that you get lower interest rates and terms when shopping for different lenders .

The Pre-approval letter

If you are pre-approved, your lender will provide you with a pre-approval letter on an official letterhead. This official document indicates to sellers that you ’ re a unplayful buyer and verifies that you have the fiscal means to make good on an offer to purchase their home. Most sellers expect buyers to have a pre-approval letter and will be more uncoerced to negotiate with those who prove that they can obtain financing .

Pre-approval letters typically include the purchase price, loan program, sake pace, loan measure, down requital sum, termination date, and property address. The letter is submitted with your extend ; some sellers might besides request to see your bank and asset statements .

Getting a pre-approval doesn ’ triiodothyronine oblige you to borrow from a specific lender. When you ’ re fix to make an offer, you can choose the lender that offers you the best rate and terms for your needs. Getting a pre-approval doesn ’ triiodothyronine guarantee that a lender will approve you for a mortgage, either, specially if your fiscal, employment, and income status change during the meter between pre-approval and underwrite .

Can I Get Mortgage Pre-approval Without a Credit Check?

It ’ randomness improbable. initial qualification without a wide recognition check may be possible with some lenders ; at that point, they may be interest just in whether you have both the income to pay back a mortgage and no credit rating red flags. But to get all-out pre-approval will likely require a credit determine. It ’ s important to know how long pre-qualification and pre-approval will be in effect. Different lenders assign different times for which their letters of pre-qualification or pre-approval are well, from 30 to deoxyadenosine monophosphate many as 120 days. Remember that multiple checks for credit history can negatively affect your accredit evaluation, so you don ’ thymine want to have them repeated frequently. For the lapp reason, you shouldn ’ t apply for it until you ’ re cook to start seriously home shop. many lenders and actual estate agents can help you get a compass of what you can afford in a general feel, so that you can avoid going through the pre-qualification or pre-approval action only to learn that there ’ sulfur nothing in your market that you can realistically afford or want .

How Long Does Mortgage Pre-approval Take?

The expect for an answer depends on the lender. Some lenders advertise same-day approval, while others may take a few days or a week. Keep in thinker that the terms “ pre-qualified ” and “ pre-approved ” may have different meanings among lenders and may be used largely interchangeably, so how farseeing they take can besides vary. It ’ mho important to make indisputable what the lender is actually doing : pre-qualification, or the deeper pre-approval.

How Can I Increase My Mortgage Pre-approval Amount?

Make surely that the prospective lender has accurate information, particularly on income and liabilities that you may have. You can ask to see the credit report that the lender used, and if you believe that it contains errors, you can contact the relevant credit chest of drawers. You ’ ll besides need to contact the company that provided the information. You can besides try early lenders, which might have different criteria. Remember, however, that multiple credit checks in a short time period can hurt your credit score.

What are the Chances of Getting Denied a Mortgage After Pre-approval?

If you ’ ve stayed within your budget, not high, but it does happen. Remember that pre-approval is a instruction that you are considered by and large qualified to pay back a mortgage, whereas the actual mortgage blessing is on a specific purchase. The lender may believe that you are paying besides much or may have uncovered liabilities that they did not find in the pre-approval. besides, if you are not able to pay a certain share of the monetary value in a polish requital, typically 20 percentage, then you may have to purchase mortgage insurance, which increases your costs. You don ’ t have to stay with the lender that gave you pre-approval, so you can consider applying elsewhere, which is a good idea in any case.

How Long Is a Home Loan Pre-approval Good For?

The good-for period varies with the lender, but typically anywhere from a calendar month to 90 days—and, in some cases, six months. It ’ s good drill to keep track of the passing date so that you don ’ metric ton run into a site where you find a ambition home that you can afford lone to learn that your pre-approval has expired.

The Bottom Line

Go through the pre-approval process with several lenders as a way of shopping matter to rates and finding the best batch. Again, you ’ ll want to shop mortgage lenders within 45 days, so that all credit rating checks count as one hard inquiry and there is minimum impact on your accredit score. And if you ’ re fair starting to think about homeownership, then the pre-approval process can help you get your credit and finances in better shape for when the time is correct .

Remember that a mortgage pre-approval doesn ’ t necessarily guarantee you a lend. Pre-approval letters are conditional on your fiscal and employment information being truthful and coherent before your loanword closes. Likewise, if you fail to disclose key information—a disassociate, an IRS tax spleen, or some other issue—and a loanword insurance broker finds out about it belated, you can receive a abnegation for your lend.

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