If you’re ready to start seriously considering buying a home, getting a mortgage pre-approval is an important first step. When you get pre-approved for a mortgage, it means you find out how much money you can borrow, the range of interest rates you can get, and the different mortgage options you have to choose from.
According to a report by Zillow called the Consumer Housing Trends Report 2022, 85% of sellers prefer to accept an offer from a buyer who has been pre-approved. Buyers agents often want you to have a pre-approval letter before they show you potential properties. When you get pre-approved, it means that you have already been approved for a mortgage. This can give you confidence when making an offer on a home, and it puts you ahead when it’s time to finalise your mortgage approval after your offer is accepted.
What is a Mortgage Pre-approval?
A mortgage pre-approval is a document that proves you are a suitable candidate for getting a home loan. In order to get pre-approved, you will need to fill out an application and the lender will examine your financial information, including checking your credit history. After you are pre-approved, you will receive a letter that tells you how much money you can borrow, the different types of loans you can choose from, and the interest rate you might be able to get.
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A mortgage pre-approval is not a guarantee that you will get a loan or a specific interest rate. However, it will give you enough information to continue your home search with confidence. Your lender will have the financial and personal information needed to process your loan approval once you have a purchase contract.
How to Get Pre-approved for a Mortgage?
The mortgage pre-approval process is basically the beginning of your loan application. In order for the lender to process your loan, you will need to give them some important information. If you have a co-signer, they will also have to give their financial information to the lender. Here are some steps to help you get started.
Gather Your Financial Documents
Being in good financial standing is one of the main requirements for mortgage pre-approval. Lenders will ask for evidence of your income, assets, and credit history. You will also need to show identification and confirm your employment. Here are some of the most common documents that borrowers are usually required to provide:
- W2 statements (from the last 2 years)
- Paystubs (from the last 3 to 6 months)
- Bank statements
- Driver’s license
- Social security number or individual taxpayer identification number
- Tax returns
Check Credit Score
Having a good credit score is important if you want to get pre-approved. Every lender and type of loan has a minimum credit score requirement that applies to both you and any co-applicant. Lenders typically require a credit score of 620 or higher for conventional loans. Before you apply for a pre-approval, it’s a good idea to request a free credit report. This will help you make sure that there are no mistakes on your report that could be hurting your credit score.
If you fill out a pre-approval application, it might affect your credit score. However, some lenders offer a free check that won’t impact your credit. This can give you a general idea of your current score. After obtaining the estimate, you can use it as a starting point to determine if you meet the mortgage qualifications set by a lender.
Search Lenders Near You
Before you contact a lender to get pre-approved, it’s important to compare interest rates and interview each of the lenders you are considering working with. If you want to find a good lender, you can begin by reading reviews online or asking your friends and family for recommendations. One more effective way to determine if a lender is suitable for you is by having a direct conversation with them.
When talking to the lender, ask them questions about their background, how the lending process works, and the different types of loans they provide. The requirements for a loan will be different depending on the lender. This includes the interest rates they offer, any fees for starting the loan, points, and the costs of closing the loan. When you shop around, you can find a lender that meets all your loan requirements.
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Lower Your Debts
When you’re getting pre-approved for a mortgage, the lender will also consider your debt-to-income ratio (DTI). This ratio compares how much you owe each month to how much you earn. The requirements for DTI (debt-to-income ratio) can differ depending on the lender and type of loan. However, in general, having a lower amount of monthly debt compared to your income is considered more favourable. If you want to know your current debt-to-income ratio, you can use Zillow’s DTI calculator.
Apply for a Mortgage Pre-approval
You have gathered all your documents, identified three or more lenders that match your requirements, and feel optimistic about your chances of getting pre-approved. Now it is time to officially begin the mortgage pre-approval process. Starting the pre-approval process is simple with Zillow. You can complete and submit all of your documents online.
Await Your Pre-approval Letter
After you complete your application and meet all the required qualifications, you will receive a pre-approval letter and a loan estimate. The letter will tell you the amount of money you are approved to borrow in advance. The loan estimate will give you information about your loan, such as how much you will need to pay each month, the interest rate, and the costs you will have to pay when closing the loan. This information is based on the loan amount you were pre-approved for.
Make sure to keep your pre-approval letter easily accessible. Real estate agents often request to review your letter before showing you houses. This is because it shows that you are a serious buyer. When you make an offer on a house, it’s important to include a letter with your offer to the seller.
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