Step 3: Get approved by a lender

How much money can you afford to pay for a home? How much do you want to pay monthly? How much money will you need to put down? These are all questions that you will need to answer before you can realistically go house hunting.

What is Mortgage Pre-approval?

Though there are several different definitions of “pre-approval” used in the mortgage industry, a pre-approval generally is a written statement from a lender stating the lender’s preliminary determination that a borrower would qualify for a particular loan amount under that lender’s guidelines. The determination and loan amount are based on income and credit information. Most pre-approval letters are good for 60 to 90 days.

A pre-approval letter is not an offer to lend, a commitment to make a loan, or a guarantee of specific rates or terms. You will be required to provide additional information including verification of income, assets and debt before a lender will extend you a loan.

Why Should You Get Pre-approved?

There are many reasons why you should get pre-approved. The most important reason is that you will get an accurate idea of how much home you can afford. This can help to target your home search and ensure you only look at houses that are truly in your price range.

A pre-approval letter also helps you prove to real estate agents and sellers that you’re a credible buyer and able to act fast when you find the home you want to buy. Some sellers might even require buyers to submit a pre-approval letter with their offers, though having a pre-approval letter does not guarantee that your offer will be accepted by a seller.

A pre-approval letter can make you stand out in a competitive real estate market. If you make an offer on a house without a pre-approval, your offer may not be taken as seriously as an offer from another buyer with a pre-approval letter.

Pre-qualification vs. pre-approval?

Sometimes these terms are used interchangeably, but they’re actually very different:

Pre-qualification

This involves providing your lender with some basic information—your income, what you owe, what assets you have, etc. They’ll look at your overall financial situation and be able to provide you with a preliminary estimate of what loan terms for which you may qualify.

When you get pre-qualified, the lender doesn’t review your credit report or make any determination if you can qualify for a mortgage—they’ll just provide the mortgage amount for which you may qualify. Pre-qualifying can help you have an idea of your financing amount (and the process is usually quick and free), but you won’t know if you actually qualify for a mortgage until you get pre-approved.

Pre-approval

This involves completing a mortgage application and providing the lender with your income documentation and personal records. You’ll usually have to pay an application fee, and the lender pulls and reviews your credit report. A pre-approval takes longer than a pre-qualification as it’s a more extensive review of your finances and credit worthiness.

Pre-approval is a bigger step but a better commitment from the lender. If you qualify for a mortgage, the lender will be able to provide: the amount of financing; potential interest rate (you might even be able to lock-in the rate); and you’ll be able to see an estimate of your monthly payment (before taxes and insurance even though you haven’t found a property yet).

What Details Are Required in the Pre-approval Process?

A lender will generally start by asking for some basic information about you and your financial history. If you have a co-borrower, the lender will also need this information about them. Generally, a lender will then request your Social Security number and permission to pull your credit report (and your co-borrower’s, if you have one). If the information you provide and the information obtained from your credit report satisfies the lender’s guidelines, the lender will make a preliminary determination in writing stating that you would qualify for a particular loan amount subject to the conditions outlined in your pre-approval letter. Please note that each lender has its own standards and processes for determining whether to grant a pre-approval letter. Qualified buyers can get a sharable and printable pre-approval letter within minutes. With traditional pre-approval, the process generally takes 24 to 48 hours.

What If You Can’t Get Pre-approved?

If you cannot obtain pre-approval there are several things that you can do. Call the Home Hotline, 1-844-995–HOME and our expert coaches may be able to help.

Some other things you can do:

  • Work to improve your credit score. Your credit score is impacted by payment history, outstanding debt, the length of your credit history, recent new credit inquiries, types of credit used, and more. Generally a score of 720 and higher will get you the most favorable mortgage rates.
  • Correct any errors on your credit report, which could help to raise your credit score. The lender will analyze your credit report for any red flags, such as late or missed payments or charged-off debt.
  • Decrease your overall debt and improve your debt-to-income ratio. In general, a debt-to-income ratio of 36 percent or less is preferable; 43 percent is the maximum ratio allowed. Use our calculator to determine your debt-to-income ratio.
  • Increase your down payment amount.

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