2023 is going to be a slow market. Homebuyers will find it difficult to get affordable housing as mortgage rates are at a record high of 7.08%.
Yet, 16% of buyers believe now is a good time to buy. If you’re one of them, know how mortgage preapproval can benefit house-hunting.
What is a Mortgage Preapproval?
A mortgage preapproval refers to authentic consent for a home loan in the form of a letter.
The lender shares it with a homebuyer, outlining the maximum amount a buyer can borrow based on the loan program they apply for.
A preapproval mortgage letter doesn’t guarantee that you will be approved for a loan. Also, the terms you’re offered may change after submitting a formal mortgage application.
It also allows buyers to explore different mortgage products and work with their lenders to find the best fit.
» Keep in Mind: Many sellers may not consider an offer without a mortgage preapproval letter.
Prequalification vs. Preapproval vs. Approval
Prequalification and preapproval are used interchangeably, but the primary difference between them is the level of scrutiny with which your information is examined.
A pre-qualification is an initial review of your finances. This might not require comprehensive documents and credit checks.
Lenders may only dig a little into your finances during a pre-qualification. They will estimate your eligibility and ask for some preliminary loan terms.
Prequalification is based on your credit score, property purchase price, down payment, monthly debt, and loan structure.
A preapproval mortgage is more in-depth than pre-qualification. Lenders require proof of your financial history and stability. It also confirms your creditworthiness in the absence of a purchase contract.
By applying for pre-approval, you complete the application and the necessary documentation.
Preapproval is based on your W-2s from the past two years, your current pay stub, a summary of your assets and total monthly expenses, and, if you already own real estate, a copy of your mortgage statement.
The lender may also check your credit report from the three major credit bureaus, i.e, Equifax, Experian, and TransUnion. To determine how you’ve managed credit in the past.
» Prequalification vs Preapproval Mortgage: Learn the difference!
What is Mortgage Approval?
A pre-qualification and pre-approval are the initial steps in the home-buying journey. However, you’ll need full approval once you’ve found your dream home.
Lenders will require the following property information to approve your mortgage.
1. Appraisal Value
Lenders ask for a home appraisal report to ensure you’re not paying more for the home than it’s worth.
» Home Appraisal Cost: Find out the average cost of a Home Appraisal in your area.
2. Home Title Report
Lenders hire title insurance or might ask buyers to hire one. To confirm who owns the property and ensure no claims or liens against it.
» Lender’s title insurance policy: What is it and what does it cover?
3. Home Inspection Report
Before closing on some loans, the property must meet specific requirements which are assessed by a home inspection. A home inspector will examine the property in a non-invasive way and create the home inspection report.
For instance, a home inspector will find issues like broken windows, missing handrails, or a damaged roof that may prevent the loan from closing. Especially if you buy the house with an FHA loan.
» Home Inspectors Near Me: Discover who the best home inspectors are in your area!
Different Types of Mortgage Preapprovals
Most lenders do offer 4 types of standard loans: conventional, FHA, VA, and USDA. Here’s a quick mortgage preapproval checklist for each one of them.
1. Conventional Mortgage Preapproval
The term “conventional” means that the loan is not part of any government program. Conventional loans are classified into two types: conforming and non-conforming loans.
A conforming loan implies that the mortgage application filed by a homebuyer meets the requirements for Fannie Mae or Freddie Mac.
On the other hand, non-conforming loans are less standardized and vary from lender to lender.
A conventional mortgage preapproval is an excellent choice if:
A. You Have a Minimum Down Payment of 20%
If you’re coming up with a 20% down payment at least, then unlike other government-backed loans, you will not be required to pay any private mortgage insurance (PMI) or guarantee fees.
B. You are Planning to Invest
Conventional loans make it more feasible to buy vacation or rental homes. They’re a good choice if you’re planning to buy a second home or looking for more investment opportunities.
C. You Require Higher Loan Limits than FHA Loans Provide
Most of the FHA loans are priced under a cap of $450,000. In comparison, homebuyers can borrow up to $645,000 for a single-family home using conventional mortgage loans.
2. FHA Mortgage Preapproval
FHA (Federal Housing Administration) grants loans to borrowers having lower credit scores and higher DTI ratios. Though, that extra credit costs a hefty mortgage expense.
An additional 1.75% upfront mortgage insurance premium fee is added to the loan amount.
Also, the borrower is charged an annual mortgage insurance premium fee of 0.45% to 1.05%, divided by 12, and added to the monthly payment.
An FHA mortgage preapproval is an excellent choice if:
A. Your Credit Score is Below 620
FHA guidelines allow credit scores as low as 500 with a 10% down payment and 580 with a 3.5% down payment.
B. You Have a High DTI Ratio
DTI stands for debt-to-income ratio. It is the percentage of your gross monthly income used to pay off your monthly debt, which determines your borrowing risk.
C. You Are Borrowing Up to the Local FHA Loan Limits
In most areas of the nation, your borrowing power will be constrained to $420,000, less than conventional loans.
3. VA Mortgage Preapproval
VA mortgage loan was made available by the United States Department of Veterans Affairs to service members, veterans, and surviving spouses
With no down payment and lenient credit requirements, VA borrowers are eligible for the loan.
Mortgage insurance is not necessary. Instead, a VA funding fee ranges from 1.4% to 3.6%, depending on your down payment and whether you’ve previously used your home loan benefits.
A VA mortgage preapproval is an excellent choice if:
A. You Have Enough Entitlement to Put No Money Down on a House
To qualify for a VA loan, borrowers must show a certificate of eligibility (COE) that verifies enough entitlement to get a loan.
B. You Need a Loan With No Down Payment for an Expensive House
VA loans don’t have loan limits, giving qualified military borrowers an advantage over civilian borrowers. It allows them to buy expensive homes with zero down payment.
» Can You Get a VA Loan With Bad Credit? Find out whether you can qualify for a VA loan with bad credit.
4. USDA Mortgage Preapproval
Borrowers defined by the USDA as low to moderate-income homebuyers in rural areas can apply for this loan.
Homebuyers can apply for financing with no down payment but must pay the guarantee fees that function similarly to FHA mortgage insurance.
A USDA mortgage preapproval is an excellent choice if:
A. Your Household Income is Within the USDA Limits
Borrowers with limited earning potential can be benefitted from this loan. Lenders examine the entire household’s income. The USDA website has the median income limits for each region.
B. You are Buying a Home in USDA Rural Area
Check the USDA property eligibility map to ensure that the area you are considering is eligible for USDA financing.
Factors Affecting Mortgage Preapproval
Each factor plays a vital role in getting your mortgage preapproved. Your financial decisions, from credit management to income stability, count.
1. Credit Score
Your credit score determines the interest rate you’ll be paying for your mortgage.
An ideal credit score is 740 for the lowest rate, while scores as low as 500 can get you a mortgage preapproval but at a high-interest rate.
2. Debt to Income Ratio
DTI ratios should be at most 43% when dividing total debt by pretax income, but high credit scores or extra mortgage reserves may allow a DTI ratio of up to 50%.
The bottom line is that even if you have perfect credit, you will only be approved if your DTI ratio is reasonable.
3. Down Payments and Closing Costs
Lenders ask for an average of 3% to 4% as a down payment. Also, you’ll have to spare an additional 2% to 4% of your loan amount to pay the typical closing costs.
The lender will investigate the source of the funds, which may include:
- Money in your savings account in the last 60 days
- Gift money from a relative, a non-profit, or an employer
- Proceeds from the sale of an asset, such as a car or a 401(k) loan
» Buyer Closing Costs Calculator: Check out the buyer closing cost in your region.
4. Employment Stability
A few lenders prefer to perform an employment stability check. This includes verifying the last 2 years employment history check, full-time salary, or other hourly earnings.
5. Mortgage Reserves
If you have several months’ worth of mortgage payments in the bank, lenders may approve a low credit score or high DTI-ratio applicant.
How to Get Preapproved for a Mortgage
The mortgage preapproval process consists of five basic steps.
Step 1: Compare the Lenders
Lenders can be found online, via a connection, or by referral. Before applying for a mortgage, comparing at least 3 to 5 different lenders is necessary.
Lower interest rates give you more borrowing power, so keep your loan estimates to negotiate the best interest rates.
» Mortgage Lenders: Choose the best mortgage lender for your property.
Step 2: Collect the Financial Documents
A mortgage preapproval highly depends upon the information provided by the borrower.
Several documents like bank statements from the last 60 days, employer contact information from the previous 2 years, or current pay stubs are required by a lender to approve the loan.
Step 3: Submit the Preapproval Mortgage Application
Make sure you enter the correct information while submitting the application.
Also, If you have applied with more than one mortgage company within 45 days, your credit score will have a limited negative impact.
Step 4: Check Your Credit Scores
Credit score impacts the preapproval mortgage process to a significant extent.
A credit score of 740 is ideal for the lowest rate, while a score of 500 can get you a mortgage preapproval but at a high-interest rate.
Step 5: Get Your Mortgage Preapproval Letter
The loan officer will issue a preapproval letter if your credit, income, and assets meet the minimum requirements for the loan program you applied for.
When you’re ready to make purchase offers, make copies for your real estate agent and seller whenever you plan to buy a house.
» Real Estate Brokers: The Best Real Estate Brokers ranked and reviewed!
What Do You Need To Get Pre-Approved for a Mortgage?
The pre-approval process is similar to the mortgage application process. Your lender or loan officer will want to examine your finances thoroughly.
You should be prepared to provide the following information:
- Proof of income
- Employment verification
- Proof of assets
- Credit history
- Debt-to-income ratio (DTI)
- W-2 statements
- Pay stubs
- Bank statements
- Social Security number
» Documents Needed For Mortgage Pre-Approval: Here’s a quick checklist for mortgage preapproval!
There are different sets of rules for Self-employed borrowers. You are considered a self-employed borrower if you own 25% or more of a business from which you earn a living.
For such borrowers, there’s a bit of a hassle involved in the process. They need to share some extra paperwork to get a preapproved mortgage.
Self-employed mortgage lenders typically average the personal earnings reported on tax returns for the previous two years.
They frequently monitor business tax returns to ensure the company’s stability. They may request profit and loss statements and letters from a CPA to explain how your income is received.
How Long Does Mortgage Pre-Approval Take?
A few hours or a few days, it depends from lender to lender.
Some lenders provide the required preapproved mortgage on the same date, while some might take days to finish the paperwork.
It also depends on the complexity of your financial situation.
It is always better to ask the lenders upfront about their timelines.
How Long Does a Mortgage Pre-Approval Last?
Generally, a pre-approval mortgage lasts for 90 days.
The preapproval letter may hold an expiration date. If you’re still looking for a home after that, you can request that the lender renew the preapproval.
If your house hunt lasts more than 90 days, the lender may need to pull a new credit report, which may affect your credit score.
» How Long Does a Mortgage Pre-Approval Last? Learn in-depth about the timeline.
When to Get Preapproved for a Mortgage?
The best time to get pre-approved for a mortgage is within the next two months of making an offer.
Should I Get Preapproved for a Mortgage by Multiple Lenders
No! You should get preapproved for a mortgage by a single lender, but it is always better to shop around and look for quotes from multiple lenders.
It helps you to compare the costs and get the best deal ever.
It’s critical to do your research before settling on a lender. You should do your research on each lender.
Even the loan officer needs to be examined before he handles your mortgage. Also, your preapproval application is reviewed by an underwriter to determine how much you can borrow.
You have yet to be fully preapproved if an underwriter hasn’t reviewed your application, so keep checking to see how your application is progressing.
Will Getting Preapproved by Multiple Lenders Hurt my Credit Score?
No, it won’t hurt your credit score significantly if the mortgage applications are filed within 45 days.
Credit review requests from lenders are termed “hard inquiries.” Inquiries that result from opening multiple new credit lines in a short period can affect your credit score.
Only apply for new credit while house hunting. Lenders will repeatedly check your credit, and new debt could result in a mortgage denial.
How to Get Mortgage Preapproval Online?
Various institutions offer the facility to apply for a mortgage preapproval online such as Bank of America, Better Mortgage, Rocket Mortgage, etc.
You must follow these simple steps to apply for a preapproval mortgage online.
Step 1: Apply for the Pre-approval
Simply apply for a mortgage preapproval on their website.
You don’t need to submit any documents or do any paperwork, but you must provide the required information about your income and debts.
A few institutions sync the borrower’s application with the bank accounts to make it easier for them to analyze.
Step 2: Decide the Type of Loan
You need to finalize the type of loan you want to acquire based on your current situation.
This is where lenders evaluate how much a homebuyer can get as a mortgage. Also, you decide on the type of loan, down payments, monthly payments, and interest rates.
Step 3: Get Your Preapproval Online
They decide whether to give you a pre-approval letter based on the information provided. You can even go one step ahead and apply for verified approval by contacting a home loan expert.
Can I Get a Mortgage Preapproval if I am Denied?
In case you did not qualify for a mortgage preapproval, the primary step is to know what turned down the application.
The two most common reasons for a mortgage preapproval denial are high DTI and low credit score.
Case 1: Higher DTI Ratio
- Pay off high-interest installment loans
- Avoid a joint installment loan
- Request a cosigner for the loan
- Reduce your loan amount or sales price goal
- Increase your down payment
- Choose a home that does not have any homeowners association (HOA) fees
Case 2: Lower Credit Scores
- Pay off credit card debts
- Include a cosigner
- Speak with a credit repair company.
- Dispute any late payments or credit report errors.
» How to buy a house with bad credit?: If you have bad credit, explore your options when buying a home.
Alternatives to Get a Preapproval Mortgage
If you need help with the above options, there is still a chance to get a loan.
“Non-QM”, short for non-qualified mortgages. Such mortgage options offer you short-term financing at a higher interest rate and a bigger down payment.
1. Loans Based on Stated Income
Rather than filing tax returns, lenders allow you to “state” your income and back it up with 12 to 24 months of personal or business bank statements.
2. Loans With No Documentation
To qualify, these loans for investment property buyers rely solely on the estimated rental income.
3. Loans for Asset Depletion
Borrowers with a high net worth may be able to convert the cash value of an asset into income.
4. Loans From Recent Major Credit Issues
Borrowers with considerable down payments and steady income may be able to get a non-QM loan the same day they finish a bankruptcy or foreclosure.
A 2 to 7-year waiting period is required for standard loan programs.
Should I Apply for a Mortgage Preapproval Now?
Mortgage interest rates are incredibly high. It is better to wait rather than rush into a real estate transaction. Also, the inventory is still very low.
In the recent quarter, the unsold inventory of existing homes stood at 3.2 months. According to NAR’s chief economist, this is a historically low supply of homes.
However, buying a house is a major and personal life decision. You can apply for a mortgage loan preapproval if you are stable enough to buy a house.
Make sure to follow all the steps mentioned above and plan accordingly.
Frequently Asked Questions
1. How to get pre-approved for a mortgage?
The mortgage preapproval process consists of five basic steps. 1. Comparing the lenders, 2. Collecting the financial information, 3. Applying for a mortgage preapproval, 4. Credit score verification 5. Getting the mortgage preapproval letter.
2. How long does a preapproval for a mortgage last?
Generally, a pre-approval mortgage lasts for 90 days.
3. What are the documents needed for mortgage preapproval?
Documents such as proof of income, employment verification, proof of assets, credit history, identification, debt-to-income ratio (DTI), W-2 statements, pay stubs, bank statements, license, and social security number
4. Can you get preapproved for a mortgage online?
Yes! Various institutions offer the facility to apply for a mortgage preapproval online, such as Bank of America, Better Mortgage, Rocket Mortgage, etc.
5. How long does preapproval for a mortgage take?
A few hours or a few days, it depends upon the lender to lender.
Eager to Know How Houzeo Works?
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What is Houzeo?
An overview of what the platform is all about
When is the Best Time to Buy a House?: Read on to find out the best time to buy a house.
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