How to Get Pre-Approved for a Mortgage
Like many people, you may be considering purchasing a home soon. If that's the case, you'll want to get pre-approved for a mortgage. This is an important step in the homebuying process and can help you save time and money.
What is pre-approval, and how to get pre-approved for a mortgage? We'll explain everything you should know about pre-approval and tell you how to get started on the process.
What’s pre-approval for a mortgage?
Pre-approval for a mortgage is a letter from a mortgage lender that indicates how much money you can borrow for a new home. The amount of money you're approved for will be based on factors like:
- Credit history/score
- Employment history
Getting pre-approved for a mortgage is important because it gives you an idea of the loan amount you can borrow. It can speed up the homebuying process as it shows sellers that you're a serious buyer, giving you an advantage when bidding on a home.
Pre-approval vs. pre-qualification
You may have heard of pre-qualification and pre-approval. While both options are important in the mortgage process, they're not the same.
Pre-qualification is a preliminary step that gives you an idea of how much you can borrow based on your financial situation. It's a good first step if you're unsure how much you can afford, but it's important to remember that pre-qualification isn't the same as a pre-approval.
Pre-approval is a thorough process that gives you a more accurate picture of how much money you can borrow for a new home. Your lender will look closely at your financial situation, including your employment history, gross monthly income, and credit score.
They'll also require documentation from you, such as pay stubs and tax returns. Based on this information, they'll give you a more accurate valuation of how much you can borrow for your new residence.
When should I get a mortgage pre-approval?
The homebuying process can be a lengthy one. So if you're serious about buying, it's a good idea to get pre-approved for a mortgage as soon as possible.
Real estate agents often recommend that buyers get pre-approved for a mortgage before beginning their home search. This is because it can save you a lot of time and hassle during the mortgage application. For example, if you're approved for a certain loan amount, you'll know to look only at homes within your price range and can bid on those homes with confidence because you know you have been pre-approved up to that dollar amount.
What do I need to get a mortgage pre-approval?
Whether you're looking for FHA loans, VA loans, or fixed-rate mortgages, most lenders will require similar documentation from you. This includes:
- Identification (driver's license, passport, etc.)
- Social Security number
- Proof of income (pay stubs, tax returns, etc.)
- Employment verification (offer letter, employment contract)
- Bank statements
- Credit score
Once you have all of the documentation, you can start the pre-approval process with your lender.
How to increase your chances of mortgage pre-approval
There are steps you can take to increase the likelihood of getting pre-approved for a mortgage. These tips may help you get the best interest rate possible and make homebuying easier.
Check your credit
Before you look for a mortgage, it's a great idea to check your credit score and report. This will offer you an idea of where you stand financially and help you identify any areas that need improvement.
Settle your credit cards
If you have any outstanding monthly debts on your credit cards, it's a good idea to try to pay them off before applying for a mortgage. This will give you a better chance of being approved for a loan and getting a lower interest rate.
Save for a down payment
A down payment is the money you put toward purchasing your home. The more money you can put down, the lower your interest rate. Most lenders ask for a down payment of at least 5% of the home's purchase price.
If you can, try to save even more for your down payment. A 20% down payment will help you avoid paying private mortgage insurance (PMI) and in some cases, will give you a lower interest rate.
Be aware of your debt-to-income ratio
Your debt-to-income ratio (DTI) is the amount of debt you have compared to your income. Lenders use this number to decide how much money you can afford to borrow.
How long does it take to get pre-approved for a mortgage?
The mortgage pre-approval process can last from a few days to a few weeks. It depends on how quickly you can gather the required documentation and how responsive your lender is.
Once you have all of your papers in order, the pre-approval process typically follows this pattern:
- You submit your application to your lender
- Your lender reviews your documentation and determines if you're eligible for a loan
- If you are, they'll send you a mortgage pre-approval letter
- You use this letter to start shopping for homes within your price range
While a pre-approval letter is not a guarantee that you'll be approved for a loan, it's still worth the effort.
Does getting pre-approved impact your credit?
Applying for a mortgage pre-approval usually results in a hard inquiry on your credit report. This can temporarily affect your credit score by a few points.
However, if you're planning on buying a home soon, the impact of a hard inquiry is typically insignificant. This is because the investigation will stay on your report for only 12 months, and its effect on your score will lessen.
In addition, having a strong credit history can help offset the negative impact of a hard inquiry. If you have a good credit score and history, the query is unlikely to affect your credit significantly.
How long does a mortgage pre-approval last?
A mortgage pre-approval is typically valid for 60 to 90 days. This is different from a pre-qualification, which is only a loan estimate and not a firm offer of credit.
If you're still shopping in the housing market after your pre-approval expires, you'll need to get another one.
If you find a home before your pre-approval expires, you can usually still use it. Most sellers accept offers that are contingent on the buyer being approved for a loan.
So as long as you can get approved for a mortgage within the contingency period, you should be able to use your pre-approval letter.
Benefits of mortgage pre-approval
There are several benefits to getting pre-approved for a mortgage:
- You will know your pre-approved loan amount (this can help you avoid looking at homes out of your price range)
- You will have a stronger negotiating position with sellers (a seller is more likely to welcome an offer from a pre-approved buyer)
- You'll be able to move quickly when you find the right home (since you've already been through the underwriting process, your loan will likely be approved quickly)
As you can see, there are sound benefits to getting pre-approved for a mortgage. If you're planning on buying a home shortly, it's a good idea to get pre-approved.
Get pre-approved today
If you’re in the market for a new home, it’s important to start the process by getting pre-approved for a mortgage. This will give you an idea of what you can afford and also speed up the process when you find your dream home.
CrossCountry Mortgage offers two great programs to help make the homebuying process easier: Lock Before You Look and FastTrack. For more information, contact us today.