How to Get Pre-Approved for a Mortgage
When you're ready to buy a home, one of the smartest things you can do is get pre-approved for a mortgage before you start house hunting. Pre-approval means that a lender has determined that you're qualified to buy a house worth a certain amount of money, and that your credit score, income, savings, debt-to-income and payment history are all in line with what they want to see. This can save you a lot of wasted time and heart-ache down the road by keeping you from falling in love with a house you can't afford.
So how do you get pre-approved? Follow these simple steps and you'll be well on your way.
1. Look at Your Credit Scores and Credit Reports
Everyone has multiple credit scores and credit reports. You need to know what scores you have and what information is on each of your credit reports. The Federal Trade Commission did a study and found that at least one in four people have an error on one of their credit reports that is affecting their credit scores. This means everyone applying for a mortgage needs to take a hard look at their reports and verify that the information on them is accurate.
The three credit reporting agencies are:
- TransUnion
- Equifax
- Experian
By law, you're entitled to a free credit report from each agency once every 12 months. If you're about to apply for pre-approval, go to www.annualcreditreport.com to get your free yearly report from each agency. If you see any errors, follow these steps as outlined by the FTC to dispute them and get them removed from your credit report. If you're a TTCU member, you have access to your credit score through our online banking, and then you'll see your credit score every time you log in!*
A strong credit report means a higher credit score, and a high credit score means a lower interest rate. Never pay more than you have to.
Which credit score will my lender use?
After looking at each of your credit scores, your lender uses the middle score to determine your interest rate. If you're buying a house with your spouse, the lender uses the middle score of the person who has the lowest scores. For this reason, sometimes it makes more sense to only have one person applying for pre-approval if that person has a strong financial profile on his or her own.
2. Upload Personal Documentation
Any lender will need a copy of your driver's license or passport to verify your identity. Just know that many lenders take issue with you simply using the camera on your phone if you don't have a scanner.
In addition to an ID, you'll need to provide your Social Security number. If you don't have one, your lender won't be able to verify your credit history. Depending on the lender, this may make it more difficult for you to get a home loan.
Once your lender has your Social Security number, they'll run a credit check to look at your credit report, your credit score, and your debt-to-income ratio. The allowable loan amount largely depends on your income and your debt. Typically credit unions and other lenders don't like to loan any amount that will send your debt-to-income ratio over 43%.
To calculate your debt-to-income ratio, take your monthly debts (such as credit cards, student loans, and car payments) and divide that by your monthly gross income. Also include your new monthly mortgage payment as part of your debts.
3. Provide Income Documentation
When you officially apply for pre-approval with a lender, they need to see income documentation. This means you'll need to provide one or more of the following:
- W-2s
- Tax Returns
- Pay stubs
If you have anything else that counts as income beyond your primary job, you'll need to provide any documentation for that, too. These can include:
- Alimony
- Child Support
- Dividend Income
- Job Bonuses
- Social Security
- Retirement Benefits
4. Provide Asset Information
You'll need to provide your lender with bank statements as well as any documentation that revolves around investments you've made and still hold. Many lenders are able to access your bank statements online without you having to scan or upload anything. Otherwise, you can print out statements and submit them.
How long does it take to get pre-approved?
The answer to this question depends on your lender. Using a credit union like TTCU, for instance, allows for local underwriting. Once you're pre-approved, it's the underwriter's job to guarantee that the house you want to buy is sufficient collateral for the loan. This can take time but is often faster when the process is kept in-house with your lender.
How long does pre-approval last?
As you may have guessed, pre-approval doesn't last indefinitely. Most lenders only guarantee pre-approval for 60 to 90 days. However, if you need a little longer for your home search you can often just speak with the loan agent who approved you and ask for an extension on the pre-approval period. You may simply need to just resubmit a few documents.
What is the difference between pre-qualification and pre-approval?
You'll have a much stronger offer on a home if you're already pre-approved rather than just pre-qualified. Pre-approval means your lender has taken a hard look at your financial situation and has given you the green light for a loan (assuming the house you put an offer on appraises for the loan amount or more).
Pre-qualification is really only an estimation. It's the amount the lender expects you could afford, but it's not a guarantee that it would actually loan you that amount. The lender goes by the information you provide and is taken you at your word. But lenders don't verify this information for the pre-qualification stage. Pre-approval is the next step because your lender has verified your financials.
How many lenders can I get pre-approved with?
That's up to you. You have 45 days after getting pre-approved with one lender to apply to other lenders without your credit report getting dinged with more than one inquiry. A hard credit inquiry drops your score by about five points, but if you do it within the 45-day window the credit bureaus know you're rate shopping and will only count it as one inquiry.
Take these steps to get pre-approved, then you're ready for the fun part: shopping for your dream home!