When you think of your home-buying journey, where do you envision it beginning? Spoiler alert: it doesn’t start at an open house for your dream home, it starts at a lender’s office. Let’s take a look at how to get pre-approved for a home mortgage.
Whatever your situation is, before you put an offer on your dream home, you’ll want to apply for pre-approval of a loan. While the process sounds similar to pre-qualification, pre-approval is actually very different. Being pre-qualified means that the lender is confident you can purchase a home, but a pre-approval letter gives you that authority. According to Bank of America, once you obtain a pre-approval letter, this letter will be good for 90 days, which means you’ll have three months of approval to buy your dream home.
But when we say, pre-approval do you know what that comprehensive process entails? Don’t fret. Just follow the below six steps to get pre-approved for a mortgage loan.
Be familiar with your credit score
Two factors that a mortgage lender will consider for pre-approval are your credit history and credit score. If you aren’t sure where to go to look at your score, Chase cites several companies you can go to including your bank and credit card companies (which often offer this for free), or through Equifax, Experian, and TransUnion (who are required to provide you with one free credit report each month). NerdWallet notes that a credit score of at least 620 is recommended, but if your credit score is 740 or higher, you’ll qualify for the best mortgage rates. If you have a lower rate, you’ll still qualify for a loan, but you’ll likely just need a larger down payment. Even with a low credit score, you can still work to improve your score by paying down your debt or making on-time payments every month. Investopedia links to a helpful interest rate tool from the Consumer Financial Protection Bureau to let you see how your credit score, loan type, home price, and down payment amount will affect your rate (and these interest rates are updated twice a week to give you the most accurate information!).
Be conscious of your debt-to-income ratio
Yes, you likely know about how much you make each week and month, but do you know your debt-to-income ratio? Typically, you’ll want all your monthly payments towards existing and future debts to be less than 43% of your monthly income. However, many lenders prefer for borrowers to have a debt-to-income ratio that is 36% or below (which includes any mortgages). If you start the process early, you’re giving yourself more time to pay off credit card balances and smaller loans, which can reduce your debt-to-income ratio and help your chances of getting pre-approved.
Know your down payment
Another factor a lender will look at is your down payment. That’s because putting a higher amount of money down will help lower your interest rate. Just know that if your down payment is less than 20%, you’ll have to pay for private mortgage insurance (PMI). This gives the lender security if you ever stop paying your mortgage. You’ll have to keep this insurance until your balance reaches 80% of your original loan amount, at which point the PMI can be terminated.
Gather your documents
Getting pre-approved for a loan requires looking at many documents, so it’s best to collect these ahead of time. Beyond your credit history and score, U.S. News notes that lenders will look at your W-2 forms from the last two years, your most recent pay stubs, copies of your tax returns from the last two years, personal bank statements from the last two to three months, and identification (i.e., a driver’s license). If you are co-borrowing, both of you will need these documents. However, if you are self-employed, you’ll need additional documentation which your lender will let you know.
Do your research
You never want to choose the first lender you look at. Make sure to ask questions and talk about the different timelines for closing, because a good lender will always explain the full process, will explain all your options, and will help you find the best mortgage given your financial situation. Doing research also helps with negotiating because you can pit different lenders against one another. It will give you the power to ask if certain companies can beat a rate. Even a small percentage difference in an interest rate can make a long-term difference over 30 years.
No matter what rate you’re given, you’ll always want to work with a financial advisor to determine how much you can afford. Just because you are approved for a high amount, doesn’t mean you should purchase a house at that price.
And, that’s how you get pre-approved for a home mortgage! If you have a pre-approval letter, reach out to Lantern Real Estate Group to get started on your home search. Or, if you need help narrowing down lenders, Lantern Real Estate Group can help with that too!
Visit Lantern Real Estate Group to chat with us today to get started!