Have you been wondering how to get pre-approved for a mortgage and what to do before applying for a mortgage loan? Read on to learn a few of the essentials to cross off the list before you take the plunge into homeownership!
1. Get Your Credit Where It Should Be
When it comes to mortgage pre-approval, checking your credit reports and scores before you apply for a mortgage may sound cliche. However, it is the first thing you need to do before applying for a mortgage. The reason is that your credit reports and credit scores are the most important aspect in order for you to mortgage pre-qualify for a mortgage loan.
Fix any credit-related issues before applying for a mortgage. If you want to be successful, don’t leave it until the last minute. Thanks to free credit score services, it is easier than ever to check your credit reports and services. Just taking the time out to monitor your credit and signing up for the service could be the deciding factor for mortgage loan approval or disapproval.
Typically, high credit scores are rewarded with lower rates of mortgage. Thus, you may save tons of money when you have a high mortgage score. Essentially, this equates to lower payments each month and a lot of saved interest. Excellent credit scores are about a FICO score of 760 or more. If yours doesn’t make the grade just yet, tackle this issue immediately. Here are a few key steps on what to do before applying for a mortgage loan:
2. Organize Your Assets
In terms of importance, assets come in a close second to your credit score. You will need cash for closing costs, making a down payment on a house and for reserves. This shows lenders that you have spare money or a cushion for any circumstance that changes.
Typically, you will need to provide the last two months’ bank statements to show lenders that you have a pattern of saving money and can actually make a first-time homebuyer down payment. Having some extra cash may even qualify you for no down payment home loans.
Deposit all your funds into one account a few months before your credit application. Ideally, your savings account should have had little to no activity for the past 90 days and contain all the necessary funding. That way, there won’t be a need for letters explaining why money goes in and out of the account constantly.
3. Hold the Spending
Avoid swiping that card unnecessarily months or weeks before your home loan application, as this can have a big impact in the long run.
Outstanding debts on your credit cards could cause your credit scores to dip. It won’t make sense to make smaller purchases that jeopardize buying a home. Also, newly acquired debt can eat into the DTI-ratio (debt-to-income ratio). This limits what you can afford to pay even if each month, you pay your credit cards in full. It would be better to purchase smaller items later on after your mortgage gets approved.
4. Start Paying Down Your Debt
Debt can play a huge role in the approval of your mortgage. With all else being equal, the less debt you have, the more you will be able to afford on your given salary. Paying down debt before a mortgage application is a win-win situation. The reason is that you will increase your credit score and at the same time boost your purchasing power. Plus, having a lower mortgage rate means that you will have more purchasing power in the future.
5. Pre-Approval vs. Pre-Qualification
When getting pre-qualified for a mortgage, you just give some basic information about your income, debt, assets and credit. The pre-qualification process, however, still varies depending on the lender. Lenders tend to estimate how much you can borrow based on your overall financial picture. You can get pre-qualified in person, online, or over the phone.
Getting a pre-qualification is quite easy compared to a pre-approval.
Once pre-qualified, you get a sense of how ready you are financially and can begin to find out the various options you have concerning the mortgage. For first-time homebuyers, getting pre-qualified is a good step when you are not quite ready to jump in and are still testing the waters.
After becoming pre-qualified, the next level is called pre-approval. This step requires you to provide proof of financial stability and history. This step involves lenders verifying your debts, assets, employment, and your income. This is also the time when your credit report will be checked. A W-2 form provides information to the lender, along with a summary of your assets and a current pay stub.
Why Is Getting Pre-Approved So Important?
When the requirements are satisfied, you will then receive a letter of pre-approval, which states the types and amounts of mortgage lenders are willing to offer you, and the terms of payment.
When making offers on different houses, you can show the letter to real estate agents and sellers. An offer of pre-approval shows agents you are a serious buyer. This gives you major leverage in the housing market, though it still isn’t a guarantee of actually getting the house you want.
Even though many people use the terms “pre-approval” and “pre-qualification” interchangeably, there are important differences that property buyers need to understand.
Pre-qualifications are informal and rely on information that you report yourself. Your data will provide a ballpark estimate of how much you are able to borrow.
The amount you pre-qualify for is not a sure thing as it is based on your provided information only. They are not “official” and will not give a seller confidence that you are a serious buyer. When pre-qualifying you, lenders won’t take a closer look at your history and financial situation. That is something they save or the pre-approval.
Pre-approvals are more accurate because they require you to present proof of income, assets and more. They involve a hard credit check and generally give sellers and real estate agents a better idea of whether or not you will be able to afford a home. When you’ve been pre-approved, you receive a written, conditional commitment for the exact amount of the loan which you may receive.