What is a Mortgage Pre-Approval?
Want to buy a property that you will love forever? Believe it or not, the first thing isn’t looking at properties. You need a mortgage pre-approval! Planning how you will pay your mortgage and other expenses is the first step toward becoming a homeowner. Our recommended experts are available to provide you with a thorough breakdown of these mandatory specifications.
So What is a Mortgage Pre-approval?
You’ll need to get approved before you can borrow the money. Even if you don’t have the funds just yet, a pre-approval means your lender has approved your application based on the details you provided (i.e., credit history, personal details, property tax details, etc.).
The length of the loan, the interest rate on the mortgage, and the initial loan amount will all become much apparent to you. When looking for a home, this will help you zero in on the ones within your price range.
Mandatory Preparation Steps
Pre-approval for a mortgage loan, like any other legal process, will require your submission of certain documentation and fulfillment of certain prerequisites.
The most fundamental requirements for lenders are:
- Income Statement and Proof of Assets
- Your Credit History
- Verification of Employment and Supporting Materials
For your convenience, let’s quickly summarize each.
Income Statement and Proof of Assets
This document is used to verify your income to mortgage lenders. The following items must be presented:
- Income Tax Form W-2 (for at least the past 2 years)
- Tax Returns
- Documents confirming payment of wages (for the past 2 years to your most recent pay stub)
- Any additional proof of earnings (side gigs)
You must provide proof of your financial assets, such as bank and investment account statements. In this article, we will discuss why. Give them something of value besides just a record of your regular income and they may be more willing to lend you money and help you get a better mortgage. This is also how much of a down payment (DP) you’ll have to make up front. The DP will be higher if you have fewer resources or lower credit scores.
Your Credit History
Mortgage companies will look at your credit report to evaluate how well you handle debts like credit cards and vehicle loans (for example student debt, car loans and others).
They may see from this how seriously you take their loan and whether or not you plan to repay it.
Many conventional mortgage providers may consider a credit score of 620 or above to be excellent. Scores of 720 and above are not unheard of. You can still be pre-qualified for a mortgage even with a low credit score. It’s likely that you’ll need a greater down payment, borrow the maximum allowable amount, and/or pay higher interest rates.
Verification of Employment
Mortgage companies will want to know how secure your job is. They will feel much safer lending you money knowing that you have a stable financial future.
In order to prove your self-employment status, you must present appropriate paperwork. Lenders have varying requirements, but often they will want to see proof of your company’s stability, a sample of what you’re selling, proof that you’ve paid your taxes, and evidence of the business’s ability to pay back loans.
Other supporting documentation may be necessary for some loan applications (for example marriage status, dependants, ID, etc.)
Having all of the necessary government paperwork on hand will make answering their questions much simpler. If the mortgage is for a joint owned property and you have a co-borrower, then be sure to have them fulfill all of these requirements too.
The Difference Between Being Prequalified and Being Preapproved
Because of their similar meanings, these phrases are frequently used synonymously; both refer to investigations into one’s financial standing.
Both are acceptable as proof of mortgage eligibility; the main distinction is the extent to which your mortgage was scrutinized. Prequalification for a mortgage typically consists of a superficial assessment.
However, pre-approval takes into account more than just your credit history and income when making a decision. Many lenders and borrowers find a pre-approval letter to be more reliable and prefer to work with those who have one.
Your credit won’t be affected by this portion of the mortgage application process. It won’t be used until you’re formally accepted.
Critical Points to Remember, Suggestions, and Criteria to Evaluate
In case you’ve never dabbled in real estate mortgage before, we’ve compiled some mortgage basics for you to familiarize yourself with.
The Asking Price Doesn’t Tell the Whole Story
One of the most typical blunders borrowers make is failing to account for all of the extra money they’ll need to pay on top of the loan amount.
The mortgage rate, down payment, interest rate, and other associated fees are just the beginning. All of these extra costs should be accounted for in the home-buying budget. Not to mention, the cost of hiring a mortgage broker.
Passing the Stress Test
If you pass, it shows that you can afford to make your mortgage payments even if rates rise. You should have at least enough to pay the current interest rate + two percent.
What type of mortgage provider should you chose?
There are many options available and you may be wondering if you should choose a bank or mortgage broker. If you’re feeling nervous, unsure, or flummoxed, consulting reputable brokers is a good idea. Despite the higher cost, you may rest comfortably knowing that you’re taking the appropriate measures.
Remember to get Pre-Approved for a Mortgage
Getting a mortgage preapproval is a smart move before purchasing a home. Be sure it’s long enough to ensure you’re not going overboard but short enough that the interest rate is still accurate.
As you can see from this tutorial, being pre-approved for a mortgage is a rather easy and painless process if you meet all the criteria on time. It is the sincere wish of our team of experts that this guide and our suggestions will prove useful to you as you embark on the exciting journey of purchasing a new home.