Mortgage pre-approval has become an important part of the home buying process for two major reasons. First, it gives you a good idea on how much home you can actually afford. While not binding, the amount you’re pre-approved for reflects the mortgage you can most likely obtain. You may use this figure in setting a budget and narrowing your choices when you go house hunting.
Second, most sellers today show their homes only to buyers with pre-approval. Having a pre-approval letter assures the seller that you have the financial capability to buy a home and the serious intent to buy.
Understanding mortgage pre-approval
Pre-approval is a non-permanent, non-binding commitment by a lender to fund your mortgage up to a maximum amount. It is given only after a thorough review of your finances. The lender will look at various information, including your credit score, income, assets, and past and outstanding loans.
Pre-approval is typically valid for 30 to 90 days. After that time, the lender will review your credit report to see if anything has changed in your finances. You also need to report any development that can affect your credit standing, such as a change in employment, a new loan or major purchase, additional or lost assets, and others.
The process is typically fast – you can get pre-approval on the same day you apply for it as long as you have all the required documents.
Required documents for pre-approval
You need to complete a loan application and provide the necessary documents that typically include:
- Proof of income
This usually includes your latest pay stubs, as well as your W-2’s and tax returns in the last two years. You can also include any proof of income from part-time employment provided you have at least a two-year history at this job and can prove that it will continue into the future.
- Proof of available cash
This is usually your bank statements in the last two to three months, showing you have the funds for the down payment and closing costs.
- Other asset documentation
This includes Certificates of Deposit, IRAs, stocks and bonds, and real estate titles or deeds.
- Credit score and credit report
The lender obtains these from the main credit bureaus and calculates your debt-to-income ratio based on your credit report. Your credit score and debt-to-income ratio play a large part in determining if you’re qualified for a mortgage, as well as the maximum loan amount, interest rate and other terms that you can obtain.
- Other documents
You will likely be asked for a copy of your current driver’s license and your Social Security card. You may also be asked for records of your residential history in the last two years, as well as your landlord’s contact information if you‟re a renter.
Tips on getting pre-approved
- Try to improve your credit score before applying so you can get a better deal.
- Improve your debt-to-income ratio.
- Make sure you understand the terms of the mortgage, as well as the preapproval process. Ask the lender, mortgage broker, or your Realtor for
- Start the pre-approval process only when you‟re ready to go house hunting to optimize the 30 to 90-day validity of the pre-approval.
The Wanda Charles Group will be happy to guide you through the pre-approval and financing process for your new home. Get in touch with us today at this website or call us at 317-674-6949.