If you’re in the market for a home, you’re likely going to borrow money to make the purchase. If you’re looking for Franklin, TN homes for sale, or you’re looking for properties anywhere else, a big part of the process is getting a mortgage pre-approval.
Below are more details about mortgage pre-approvals and how they work as part of the process to buy a house.
What is a Mortgage Preapproval?
When you begin home shopping, a seller will usually expect you to get a pre-approval for financing. Most will negotiate with a buyer who can show they are going to be able to get a loan.
A mortgage preapproval is a lender’s letter saying they agree, tentatively, to lend you a certain amount to buy a house.
This is also known as conditional approval for a home loan, and it lets sellers know that you’re likely to be approved for a certain amount of financing. This amount is based on information from your preapproval application.
A pre-approval isn’t a guarantee, however, that you’ll be approved for a mortgage. There is a possibility the terms you’re offered could change once your formal mortgage application is complete and submitted.
The time it takes to get a preapproval varies depending on the lender. You might get a preapproval in a few minutes, or it could take a day. Sometimes it can take ten days or more.
A lender will evaluate your financial history before issuing a preapproval letter. They will pull your credit score and report.
Pre-Qualification vs. Preapproval
A pre-qualification is when a lender doesn’t necessarily delve too deeply into your financial situation. Instead, a pre-qualification is when a lender considers the self-reported details you provide them, including your estimated credit score and the purchase price of the home. You might also self-report your monthly debts and down payment and the purchase price of a home you want to buy.
A pre-approval is different because your financial information has been pulled and verified. You complete a full application, and a lender puts an offer in writing, saying they’ll give you a loan at a certain interest rate.
Even when you have preapproval, your loan will still have to go through underwriting. Underwriting is a final due diligence stage that comes before the loan is issued once you have a home under contract.
Requirements for Pre-Approval
A mortgage pre-approval requires a buyer to complete a mortgage application and provides asset proof, confirmation of their income, employment verification, and other documentation.
Your pre-approval will be based on your FICO score and your debt-to-income (DTI) ratio, among other things.
Aside from jumbo loans, all loans will conform to Fannie Mae and Freddie Mac guidelines. Some types of home loans are specifically designed for low-to-moderate-income homebuyers or first-time buyers. With something like a VA loan, no money down is required, and these are for veterans and service members.
Below, we specifically break down the things that will be needed for your pre-qualification.
- Proof of income: A potential homebuyer will need to provide a W2 wage statement and tax returns from the previous two years, current pay stubs showing income and year-to-date income, and proof of any additional sources of income, like bonuses or alimony.
- Proof of assets: Your bank and investment account statements will show that you have the funds needed for a down payment, as well as to cover closing costs and cash reserves. Your down payment is expressed as a percentage of the price of a home, and how much you’re required to put down varies by the type of loan. If you aren’t going to put down a minimum of 20% of your purchase price, it’s likely your lender will make you buy private mortgage insurance.
- Your credit: A lender will typically require borrowers have a FICO score of at least 620 for a conventional loan and 580 for an FHA loan. The lowest interest rates that are most competitive are usually for customers who have a credit score of at least 760.
- Verification of employment: A lender will verify your employment through something like your pay stubs, but they might also call your employer. They’ll confirm that you actually are employed and your salary. If you’re self-employed and you want to get a mortgage, the lender will ask for other information to show that your income is stable, you’re financially secure, and you’ll likely be able to continue generating income in the future so you can make your required payments.
You might also have to provide documentation like a copy of your driver’s license, authorization for a lender to pull your credit history, and your Social Security number.
Why You Need to Get Pre-approved
You technically don’t have to get pre-approved before you start looking for houses, but there are some reasons it’s a good idea.
First, it helps you be a more appealing buyer because you can show a seller that you have your lender’s backing. You’re demonstrating that a lender has looked at and verified your financial background and then made a determination of how much home you can afford.
You can save time yourself when you get pre-approved because you’ll know how to target homes that you can afford. You can also focus on narrowing down houses based on the features you want rather than the price.
You’ll have more negotiating power because a seller will know that you’re serious since you’ve already talked to a lender.
Getting a pre-approval is a helpful way to reduce potential surprises that could arise when it’s time to make an offer. You’re starting the process so that you’re much less likely to deal with unexpected things later on.
You can also speed up your closing process when you have a pre-approval because your financial information has already been largely collected and then is in the system of the lender. During this time, remember you may have to answer questions from your lender because they are going to want to know the details of your finances.