Steps to Home Loan Pre-Approval
If you’ve been thinking about buying a home, you probably know what you want—an island kitchen, a big backyard, a finished basement. Scrolling through the perfectly staged pictures in online listings can fuel your dreams, but your home-buying journey begins once you get pre-approved for a home loan.
Home loan pre-approval is the process of figuring out what kind of mortgage you may be eligible for and how much money a lender is willing to let you borrow. It allows you to shop smarter, make stronger offers, and have a better shot at getting your dream home. Let’s look at some actions you can take to get your pre-approval letter in hand.
Know when to get pre-approved
The best time to get pre-approved is when you’re ready to start looking for a home. It usually takes a few days to a week to receive pre-approval, but it could take longer if you undergo an income audit or other holdups. If you wait until you’ve found the home of your dreams, it may be too late to get pre-approved in time to put an offer in.
However, remember that mortgage pre-approval offers come with an expiration date. Most last for 90 days, but some may expire more quickly. Your pre-approval letter will state exactly how long the offer is good for.
Determine your monthly budget
The most important part of any major purchase is making sure that you’ll actually be able to make the monthly payments. Before you start applying for pre-approval, crunch the numbers and decide how much you feel comfortable spending each month. You may find that some lenders will approve you for a higher monthly payment, but having a defined budget in mind will help you choose the best offer for your needs and situation.
Check your credit score
Mortgage pre-approval usually requires a hard inquiry into your credit history. Therefore, it’s in your best interest to check your credit before lenders do, in case some issues impact your chances of getting pre-approved. Disputing errors and working with creditors to resolve other issues can bump your score before you start reaching out to lenders. If you’re applying for a conventional mortgage, you’ll generally need a credit score of at least 620 to qualify. If your score is lower, that doesn’t necessarily mean that you can’t get pre-approval, but the higher your credit score, the lower your interest rate will be.
Calculate your debt-to-income ratio
Debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward debt payments. That includes credit cards, student loans, car loans, etc.—and when you’re applying for pre-approval, it also includes the prospective mortgage payment. Lenders generally prefer borrowers with a DTI of 36% or lower. If your DTI is high enough to hurt your chances at pre-approval, you may need to take action to lower that number by refinancing, getting on an income-based repayment plan, or paying down debt more aggressively.
Collect any required documents
When you apply for pre-approval, your lender will be taking a comprehensive look at your financial situation. You should be prepared to provide the following documentation:
- W-2 statements from the past 2 years (all employers)
- Pay stubs
- Bank statements from the past 2-3 months
- Driver’s license or other legal identification
- Social security card
Depending on your situation, you may also need:
- Rental information and landlord references
- Gift letters (if a loved one gives you money to put towards a down payment)
Shop around for a lender
These days, you aren’t limited to your local bank—you can shop for mortgage pre-approval online or in-person, and there’s no shortage of convenient options. Every lender has different guidelines and interest rate options, so comparing offers from multiple lenders can help you get the best deal possible. As we mentioned above, applying for pre-approval requires a hard credit inquiry, so your credit score may take a slight hit. However, if you submit all your applications within the same window of time (shoot for 14 days), your credit score will only get dinged once.
Choose a lender
Once you’ve made an offer on your dream home, it’s time to get official loan estimates from your list of pre-approved lenders. The lender should provide the estimate within three business days of receiving your application. It will include estimates for your monthly payment, interest rate, closing costs, and taxes and insurance, as well as details on how the loan works. (Keep in mind that if your financial situation has changed since you applied, your offer may also change.) Now you can compare estimates from different lenders and choose the best fit for your needs.
Mortgage pre-approval is a great first step to buying a home. Getting pre-approved gives you a clear idea of how much you can afford, as well as allows you time to correct your credit (if necessary) before actually taking on a loan. But perhaps most importantly, coming to the table with pre-approval shows that you’re serious about buying a home, helping you stand out from the crowd in a sea of prospective buyers.
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