Start The Preapproval Process
If youre ready to start house hunting or even considering it in the near future its time to start the mortgage process by getting preapproved for a home loan.
The approval process will help you lock in your borrowing power and give you an advantage in a competitive housing market. Itll also turn up relevant issues, like a low credit score, that you might fix before beginning your homeownership journey.
Ready to get started?
How Much Can I Be Pre
The amount of loan you qualify for depends on several things, including your income, DTI ratio, credit score, and your loan-to-value ratio.
Your LTV ratio is calculated by dividing the loan amount by the homeâs value. Generally speaking, the higher the ratio, the higher your interest rate. You can bring your LTV ratio down, however, by making a larger down payment.
If your LTV ratio is above the accepted limits by your lender, you may have to purchase private mortgage insurance , which gives lenders protection should you default. On a $200,000 loan with a 5% down payment, your PMI would be $130 a month.
There are circumstances where you may be pre-approved for more than the purchase price of the home, such as if it needs substantial repairs. If this is the case, speak to your lender about your ability to customize a mortgage.
For Freelancers And Independent Contractors
Self-employed borrowers dont receive W-2 forms or pay stubs from an employer, so theyll need to produce the following pre-approval documents to show theyve earned a steady income for at least the past two years:
- Business and personal tax returns from the past two years
- A copy of current state or business licenses, if applicable
- IRS Form 4506-T, which allows lenders to access your tax records
- A profit-and-loss statement
- Asset account statements, such as retirement or investment accounts
- Any additional income, such as Social Security or disability
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Different Lenders May Request Different Levels Of Information And Documentation
Some lenders base preapproval letters solely on the information you provide. Other lenders dig into the details with you now to make certain you have all the documentation you need and prevent delays and surprises later. Ask questions. All lenders will require documentation at some point if you decide to apply for a loan. Its better to know now that you need an additional document than when youre about to close.
Opening Lines Of Credit
You can still be denied a mortgage even after being pre-approved for one. Mortgage lenders check your credit during pre-approvaland again just before closingbefore giving you the final green light. In the interim, maintain the status quo in your credit and finances. That means not opening new lines of credit or closing existing lines of credit. Doing so can lower your credit score and increase your debt-to-income ratioboth key reasons for a lender to deny final approval.
Instead, wait until after youve closed on your home to take out new lines of credit . And while its great to pay off a credit card account or loan before you close on your home, closing the account removes that credit history from your report. Length of credit is one of the key factors credit reporting bureaus use to generate your credit score.
Instead, leave the account open and active, but dont use it until after closing.
Some credit card companies may close your account for long-term inactivity, which can negatively affect your credit, too. Keep accounts active by making small purchases that you pay off immediately and in full every month.
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For Landlords And Investors
If you rent out an investment property, your tenants rent payments can count toward your income. This can help you qualify for the new mortgage.
For documentation, youll need to provide a current lease that shows the rent amount.
Credibles pre-approval process is quicker than most it takes just a few minutes and can help you compare prequalified rates from all of our partner lenders conveniently online.
Credible makes getting a mortgage easy
- Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
- We keep your data private: Compare rates from multiple lenders without your data being sold or getting spammed.
- A modern approach to mortgages: Complete your mortgage online with bank integrations and automatic updates. Talk to a loan officer only if you want to.
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Review Your Financial Situation
Before you apply for preapproval, it’s a good idea to assess your current financial situation.
Pull your credit report: Under normal circumstances, you’re entitled to one free report from each bureau every 12 months, but you can now get a free credit report every week through April 2021. Review your credit history to make sure everything is accurate you can reach out to lenders and the credit bureaus to make corrections if need be.
Calculate your debt-to-income ratio: A key factor in getting prequalified for a mortgage, your DTI ratio represents your total monthly debt payments as a percentage of your monthly income. Most lenders won’t offer a loan that will put your DTI above 43%. So, if you currently have an auto payment of $300, monthly minimum credit card payments of $65 and a monthly income of $5,000, your lender will only approve you for a mortgage with a monthly payment of $1,785.
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Purchasing With Another Veteran
Another veteran who has VA loan entitlement can be a co-borrower, as long as this person will live in the home with you as his or her primary residence. Theyll face the same credit and financial scrutiny as a spouse. VA approval is required for this type of setup, unless the veteran happens to be your spouse. You can choose to use your entitlement solely in cases like this or opt for a dual entitlement scenario, with each eligible borrower utilizes a portion of their VA loan entitlement. Its usually best to talk with a VA lender in more detail about how to proceed in cases like this.
A Mortgage Preapproval Is A Letter From A Lender Saying That Its Tentatively Willing To Lend You A Specific Amount For A House
Getting preapproved for a mortgage is a crucial first step in the home-purchase process. Sellers often want to see a preapproval letter before accepting your offer on their home.
Fortunately, the process of applying for preapproval is relatively quick and simple. Lets explore what you need to do and how a mortgage preapproval can benefit you during the home-buying process.
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Get A Prequalification Or Preapproval Letter
A prequalification or preapproval letter is a document from a lender stating that the lender is tentatively willing to lend to you, up to a certain loan amount.
This document is based on certain assumptions and it is not a guaranteed loan offer. But, it lets the seller know that you are likely to be able to get financing. Sellers frequently require a prequalification or preapproval letter before accepting your offer on a house.
Employment And Income History
When you apply for a mortgage, lenders go to great lengths to ensure that you earn a solid income and have stable employment. Thats why lenders request two years worth of W-2 tax forms and contact information for your employer. Essentially, lenders want to ensure that you can handle the added financial burden of a new mortgage.
Youll also be asked to provide salary information, so a lender has evidence that you earn enough money to afford a mortgage payment and related monthly housing expenses. Youll also have to provide 60 days of bank statements to show that you have enough cash in hand for a down payment and closing costs.
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Documents Needed For Mortgage Pre
To begin the loan pre-approval process, youll want to have several documents ready for the lender.
Its important to remember that the documents one lender requires may be different from those of another. Regardless, these are the most common documents requested when seeking mortgage pre-approval and should help you get started.
Age, marital status, number of kids and their age. Two pieces of government issued identification is a must.
Expect to provide information on where youve lived over the past few years as well. That includes the details if youre renting or living with parents and have dependents .
Social Insurance Number
Verified through your SIN card, tax documents, or other official documents that show your SIN. The lender uses this to confirm your identify and acquire your credit report / score.
A list of your current and previous employers dating back two years or more. That includes their name, address and contact information. A lender wants to verify your employment.
If youre self-employed, a statement of your finances from an accountant can be a good start. The lender may ask for more documentation such as tax statements to prove your self-employment and financials.
Have bank statements for each of your accounts prepared. Lenders want to make sure you have enough funds in your account to take care of extra costs associated with buying a home. Two examples are the down payment and closing costs.
How Long Does Mortgage Pre
The wait 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 mind that the terms pre-qualified and pre-approved may have different meanings among lenders and may be used largely interchangeably, so how long they take can also vary. Its important to make sure what the lender is actually doing: pre-qualification, or the deeper pre-approval.
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A Lenders Role In The Home Purchase Process
For most people, mortgage lenders hold the key to completing a home purchase. Yet, the ways in which they help potential buyerssuch as providing a preapproval letter and ultimately extending a loanremain unclear and undervalued.
In some cases, lenders may just market their services less prominently than real estate agents. In other cases, people may resist discussions about their financial history. And, for almost everyone, its just more fun to admire and tour homes currently on the market.
In reality, though, a home buyer is more likely to close on the house that they want if they contact a lender at the beginning of their search. What may feel to a first-time home buyer like the most intimidating part of the process will lead to less stress and disappointment in the months that follow.
From the sellers perspective, a preapproval letter from a reputable local lender often can make the difference between accepting and rejecting an offer. As a result, buyers would benefit from educating themselves on the steps required to reach that point.
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Can You Get Pre
The short answer is yes, but there are best practices to be aware of before deciding to get pre-approvals from multiple lenders so you do not hurt your credit score.
If you choose to shop around for pre-approvals from multiple lenders, you typically have a 14 day window where multiple lender credit inquiries are counted as a single credit inquiry and will not negatively impact your credit score. So, to be safe, get those multiple credit reports pulled in the same 14 day time period.
How A Mortgage Preapproval Affects Your Credit
The credit check required for a mortgage preapproval is identical to the one performed when you apply for a mortgage. This check is considered a hard inquiry on your credit report, which can temporarily lower your credit score a few points.
If you fill out several applications in the process of shopping for a new loan, credit scoring systems treat the credit checks related to those applications as a single event, as long as you make them within a few weeks of each other. Note that the various FICO® Score models will combine inquiries made within the same 45-day period and treat them as one event the VantageScore® system uses a rolling two-week window that resets each time you make a similar loan application within two weeks of the one that preceded it.
This allows you to shop around for the best possible terms without worrying that each credit inquiry will harm your ability to qualify for a new loan.
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What Is Mortgage Preapproval
Preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide. Theyll also perform a credit check. If youre preapproved, youll receive a preapproval letter, which is an offer to lend you a specific amount, good for 90 days.
Does Preapproval Affect Your Credit Score
Getting preapproved for a mortgage has an impact on your credit score. Thats because when lenders check your credit, they perform a hard inquiry, which can drop your score by a few points. The good news is that the effect is small, and gets even smaller as time passes: Hard inquiries come off your report entirely after two years.
If youre planning to get a preapproval from more than one lender, aim to do it within a 45-day window to avoid more damage to your score than necessary. Inquiries within this time frame will be counted as one inquiry, instead of multiple.
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What Does It Mean To Prequalify For A Loan
As you prepare to buy a home, youll likely come across the term loan prequalification. This is the first step in the mortgage process, where a lender provides a ballpark estimate of how much house you can afford.
Prequalification is typically quick and easy you dont have to provide documents to the lender, only answer a few short questions.
What Documents Are Needed For A Mortgage Preapproval
- Pay stubs from at least the past 30 days Your current income is a major consideration in getting preapproved for a loan, so your lender wants to see that you have a reliable, predictable cash flow coming in.
- Federal income tax returns from the last two years These will help verify your employment history and show the lender a longer-term track record of your income.
- Bank statements from at least the past two months Lenders like to make sure all your money is accounted for, so they want to check your bank statements to see that there arent any major unexplained deposits or withdrawals that could affect your loan.
- Investment account statements Returns on your investments can count as income, and lenders need to know about all your sources of money, not just your day job.
- Documentation related to any gift funds youre receiving If a family member or friend is giving you money to help you buy a home, put together a document signed by them explaining the gift and the amount, and that the gift will not need to be repaid.
- ID (such as a drivers license or passport Lenders need to make sure they know who theyre giving their money to, so theyll want to verify your identity and that youre a U.S. citizen. Foreign nationals can get financing, but its much more complicated.
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Get Your Financial Paperwork In Order
You are under no obligation by getting pre-approved, but you want to be comfortable with the amount and terms of your pre-approved mortgage. That’s why it’s essential that you review all your personal expenses and have a good idea of your future expenses before you talk with a mortgage broker or lender about pre-approval. Learn more about knowing how much you can afford.
Is A Mortgage Pre
Do you need a mortgage pre-approval letter to make an offer on a house? You know you need to get your ducks in a row before looking at homes, but does that include securing a pre-approval letter from a lender?
The truth is, getting pre-approved can actually improve your chances of falling into the sellers good graces, so you want to get it done as soon as possible in the home-buying process.
So how organized do your financials need to be before you start looking? Lets take a look, starting with clarifying what a pre-approval letter actually is.
What is a pre-approval letter?
Mortgage pre-approval is assurance from a lender to provide you with financing to buy a home up to a certain loan amount. Its a letter from your lender, on the lenders letterhead, that states that you have approval for a loan of a specific dollar amount.
To get approval, your lender will collect paperwork from you that will include pay stubs, federal tax returns, W2s, investment accounts, and residential history. Once your lender analyzes your financial story, they will decide whether or not to issue you a pre-approval letter.
Do you need a pre-approval letter to see a house?
Real estate agents prefer showing homes to buyers with a pre-approval letter, because it shows the buyer is financially capable of purchasing. Agents want to know if you can really buy a home, a pre-approval letter isnt mandatory to tour a home.
How a pre-approval letter benefits you.
How to get a pre-approval letter.
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