What is a Mortgage Pre-Approval?

Buying a house can seem like a daunting process, but getting a pre-approval from a lender will help you understand what you can afford to purchase, what different types of loans you qualify for, and how much it will cost you monthly.

Before you can make a successful offer to purchase a property, you'll almost always need to provide the seller with a copy of your pre-approval letter. You might hear the terms pre-qualification and pre-approval used interchangeably, but the difference is that a pre-qualification is based on information you provide to the lender, while a pre-approval goes one step further and actually pulls your credit and verifies the information you've provided. In order to feel confident knowing what you are actually able to purchase, you'll want to go beyond pre-qualification and actually get pre-approved. Here are a few of the things your lender might request after they receive your completed loan application:

• Recent bank statements

• One month of pay stubs

• Two years of tax returns

• Asset account statements

You might think it's best to start with a pre-qualification to get a rough estimate of your budget rather than have a lender pull your credit and take the time to fill out a full application and track down all these documents if you're not sure if you're able to buy what you want yet, but when going through the pre-approval process your lender will see things that you might not know are important factors in whether or not your loan will be approved, and at what amount. In an effort to help buyers get the information they need without a negative impact on your credit score, credit bureaus will only count mortgage applications as a hard inquiry on your credit report once every 45 days, so you can shop rates and programs with different lenders if you start the application with one and find you have more purchase power with another. Here are some of the things your lender will be looking at during the loan application process:

• Credit Score - A minimum of 620 is usually required, but the higher your score the better the rate you qualify for. Sometimes this can be a determining factor in whether you qualify or not, but will also affect your maximum approval amount. Keep in mind that the consumer credit score you see if you monitor your credit online might not be the same as the mortgage score your lender sees.

• Debt to Income Ratio - This is the amount of debt you currently owe (mortgages, credit cards, student loans, etc) compared to how much income you bring income. Lenders want to see this amount stay under a certain number and it determines how much they will allow you to take on in additional mortgage debt.

• Income and Employment - Although income can come from places other than traditional W-2 employment, you'll want your lender to verify that all your sources of income that can be used to help you qualify are being used. You might want to claim spousal or child support to help you qualify for more, or rental income on a different property. Maybe you're self employed or recently changed jobs. Your lender can help you make sure that you've taken the necessary steps to have as much of your actual gross income qualify as possible.

• Loan to Value Ratio - This is based on the amount of down payment funds you have available to use and many loan programs have their own requirements here that you must meet to qualify. Some loans will allow up to a 100% LTV, which means you are required to bring $0 for a down payment. Although you may still need cash for closing costs, depending on the terms of any purchase and sale contract your agent might negotiate for you, this is a significantly lower amount than a down payment would require. Your lender will see how much money you have available in your accounts to determine what type of loan program they can qualify you for.

Most lenders don't charge you for a pre-approval, so taking the time to have someone look over your financial information and advise you on your options is definitely worth your time. A good lender will let you know if there are any issues with your credit, income, or assets that are negatively impacting your approval and guide you through different ways you can improve your situation. Sometimes small changes or additional verifications can quickly change a denial to an approval, or increase your purchasing power by dropping your interest rate.

If you're thinking about getting pre-approved but don't know where to start, reach out to us and we'll help you find a great lender to get your application started today!