If you are looking for a home, then it is essential to get preapproved `for a mortgage. Attaining a preapproval letter before consulting with the lender provides you the opportunity to discuss the budget and available loan option with the lender, which in turn helps in clarifying the budget of your house-hunting and mortgage payment that you can handle on a monthly basis. It is essential to be careful regarding the comfort level related to the house payment instead of aiming for the top of their spending limit.
How to Get Preapproved for Mortgage?
Before deciding to preapprove a person for a mortgage, the lenders assess different core factors such as:
- Assets and liabilities
- Credit score
- Credit history
- Employment history
- Debt-to-income ratio
Now, if you are planning to buy a house, then the first question that comes to mind is how to get preapproved for a mortgage? You should consider mortgage preapproval as your finance exam. The lenders can poke and prod in your financial life in order to make sure that you repay the mortgage. If you are planning to borrow, then it is essential for you to know what a mortgage preapproval requires and how you can improve the chances of getting one. Here is an article with all you need to know regarding the mortgage preapproval process.
Prequalification vs. Preapproval
Many people confuse the term prequalification with loan preapproval mortgage, but they both are different. In prequalification, you provide information regarding your finances, debts, and income to the montage lender. After this, the lender gives you information about the estimated loan amount. Mortgage prequalification is beneficial in this way, as it provides information regarding how much you can spend on buying a home. Nevertheless, in this process, the lender does not ask for your credit card reports and does not verify your financial information. In this way, prequalification is beneficial to determine how much you can afford.
On the other hand, preapproval is the process that includes filing an application for a mortgage and then rendering your social security number in order to allow the lender to carry out the process of credit card check. The process of hard credit card check gets activated when the lender checks your credit card details and credit score in order to analyze your creditworthiness. These checks are collected and mentioned in your credit report and play an essential role in your credit score.
In addition to this, you also need to provide information regarding your bank accounts debts, assets, income, past addresses, employment history, and other crucial details so that the lender could verify. These details help the lenders in ensuring that you can repay the mortgage.
This information makes the preapproval more valuable. It means that the lender has verified all the details in order to approve a particular loan amount. The occurrence of final loan approval takes into account when the appraisal is completed, and the loan is applied to a specific property.
Right Time to Get Preapproval
The letter of mortgage preapproval is valid for around 60 to 90 days. An expiration date is put on the letter as the credit profile of the borrower could change. After the expiring of the preapproval, you need to fill a new application for the mortgage and submit the paperwork again to get new preapproval.
If you are planning to buy a home and suspect that you might face challenges in getting a mortgage, then it is a good idea to go through the process of preapproval as it can help you in finding out the credit issues, and you also get the time to address them. You can seek in advance preapproval from six months to one year in a situation of the serious home search; then, it can help you in enhancing your overall credit profile. In addition to this, you will also get more time to collect money for closing costs and down payment.
When you are finally ready to make offers and buy a home, then sellers often prefer to see mortgage preapproval. In many cases, they even opt for seeing proof of funds in order to see that you are a serious buyer. In varied housing markets, due to intense demands and limited homes, sellers do not consider offers if you do not have a preapproval letter.
Process of Preapproval
If you are interested in buying a home and planning to apply for a mortgage, then it can be confusing, nerve-wracking, and exciting at the same time. Some online lenders pre-approve you within hours, whereas others take several days. The timeline of approval depends on the complexity of your finance and the lender.
In order to get a mortgage, first, you need to fill the mortgage application. You need to include your identification information and your Social Security number in order to pull the credit. The mortgage credit checks conduct a hard inquiry on your reports of credit, and it might affect your credit score. In addition to this, if you are shopping from different lenders in a short time period, then the integrated credit checks are counted as a single inquiry.
If you are planning to apply with a co-borrower, then both the applicants are required to list the employment and financial information. Below mentioned are eight sections included in a mortgage application.
Mortgage type and Loan Terms
You need to render information about the particular loan product that you are applying for. You also need to render details about the loan amount and terms like amortization (time length to repay the loan), and interest rate.
Legit description of the property, address, and the year built. You also need to mention whether you are taking the loan for new construction, purchase, or refinance. In addition to this, you also need to mention the targeted type of residency.
Information of the Borrower
You need to render your identifying information that includes your full name, Social Security number, the date of birth, marital status, address history, year of the school attended, and the total number of dependents.
You have to provide details about current and past employers, titles, monthly income, and dates of employment.
Information about Monthly Income and Housing Expense
A listing of base monthly salary, bonuses, net rental income, overtime, commissions, and other types of income like alimony or child support. You would also require an accounting of your monthly house expenses, including mortgage payments, or rent, property taxes, mortgage insurance, and association dues of homeowners.
Assets and Liabilities
You need to provide a list of credit union checking, savings, and bank accounts, including information about current balance amounts. You also have to provide information about life insurance, bonds, retirement savings, mutual fund accounts, stocks, and corresponding value. You also require statements of banks and investment accounts in order to prove that you have sufficient funds to make the downpayment and closing costs and the cash reserves.
You would also require a list of liabilities that include child support, student loans, alimony, and any other debts.
You will need an overview of the main transaction details including loan amount, estimated closing costs, purchase price, mortgage insurance, and buyer-paid discounts,
You would require an inventory of any pending lawsuits, foreclosure, judgments, delinquent debts, or liens. You also need to state whether you are a permanent resident or a U.S. citizen and whether you plan to use the house as your main residence.
After receiving the mortgage application, the lender is required to give you a three-page document known as the loan estimate within the next three business days. This paperwork includes information about preapproval of the mortgage and outline of the loan terms, amount, interest rates, estimated payments, interest, and estimated closing costs. It also includes details regarding estimates of property tax, homeowner’s insurance, and special features of the loan like early payment penalty and balloon payments. In addition to this, it also specifies a maximum amount of the loan on the basis of your financial pictures in order to help you in determining your home-buying budget.
In case you are preapproved for the mortgage, the loan file gets transferred to the loan underwriter, who is responsible for verifying the documentation for the mortgage application. The underwriter also makes sure that you meet the guidelines of the borrower for the specific loan for which you are applying.
After submitting the application for a mortgage, you need to collect certain documents in order to verify the information. If you are prepared, then it will help in carrying out the process smoothly.
Here are some documents that you would require to secure approval for the final loan.
- Bank statements of 60 days.
- Pay stubs of 30 days.
- Self employers borrowers would need schedule K-1
- W-2 tax returns for the last two years.
- Income tax returns
- Account statements of assets
- U.S. passport or driver’s license
- Divorce paper (in case you want to use child support or alimony as qualifying income)
- Gift letter
Gifts of Down Payment
Many loan products render the facility to the borrowers to make use of a financial gift from the relatives for the down payment. If you opt for this option, then you will be asked to fill a standard gift letter in which the gift donor and you mention that the gift is not any loan from a third party. In case it is a loan from a third party, this arrangement could lead to an increased debt-to-income ratio, which would impact the final approval for the loan. In addition to this, you and the donor are required to render bank statements in order to source the cash transfer from one account to the other.
Factors Impacting Preapproval
If you want to enhance the chances of getting a mortgage approval, then here are some factors that could help you.
History of employment and income
When you apply for getting a mortgage, the lenders conduct in-depth research in order to make sure that you have stable employment, and you earn sufficient income. Therefore, the lender requests you to provide W-2s of two years and employer’s contact information.
The lender wants to make sure that you are able to handle the additional financial budget of the new mortgage. You will also need to provide salary details as proof that you can afford to make payments for mortgage and associated monthly housing expenses. You also need to render bank statements of 60 days in order to show that you have sufficient cash for making closing costs and down payments.
FICO Score and Credit History
Three main reporting bureaus are used by lenders in order to pull credit card reports; these include, Equifax, Transunion, and Experian. They check your payment history, and whether you pay your bills on time. In addition to this, they will also check what type of and how many open credit lines you have and the time length you have had these accounts.
Apart from positive payment history, positive payment history, the kenders also assess how much credit you use actively, which is known as credit utilization. It is better to manage a credit rate below or at 30% as it helps in enhancing the credit score. It also shows lenders that you follow adequate patterns for managing debts and paying bills. All of these items are responsible for managing FICO scores. Many types of leaders also use the credit score model.
You might face trouble in getting mortgage preapproval if you do not have conventional credit lines, or opened credit cards, or student loans. Opening a starter credit card, having a low credit limit and paying bills properly every month can help you in building your credit score so be patient while you build your credit score.
The DTI ratio includes measurements of monthly debts associated with the monthly income. In order to get a percentage, lenders add up all the debts like student loans and other credit lines with the new mortgage payment and then they divide the total amount with the gross monthly income. In order to get approval for the mortgage, depending on the type of loan, the borrowers should try to manage a DTI ratio of less than 43% of the gross monthly income.
In addition to this, if you have a lower DTI ratio, you can qualify for better interest rates. Try to pay all your debts before purchasing a home. It will not only reduce your DTI ratio but will also help in showing that you are able to pay the bills on time and manage the debts responsibly.
It is another primary metric that is used by the lender to evaluate you for the purpose of mortgage. It is calculated by dividing the total amount of loans with the value of the home. The value of the property is determined by property appraisal. It might be higher or lower as compared to the price the seller is asking for. The LTV ratio formula is used in the scenario when the down payment comes into the picture. A down payment refers to the upfront amount of many that you pay to the seller in cash at the closing table. The lower LTV ratio will be lower if your down payment is high, and the loan amount is low.
Types of Loan
Jumbo loans are basically confirming, which means that they conform to the guidelines of the government-sponsored enterprise. Some types of loans, like Home Possible and HomeReady, are designed for first-time buyers or buyers who have a low-to-moderate-income. Veterans Affairs loans are the ones that do not require money down, and they are for service members, not-remarried spouses, and U.S. veterans.
Conditions for Self-Employed Borrowers
The conditions of mortgage approval are quite different for self-employed borrowers. They might need to provide additional documents in order to show work history and consistent income of around two years. Some of the requested documents might include a business license profit/loss statement, federal tax returns, bank statements of the previous year, balance sheets, and signed statements of your accountant. Self-employed borrowers are required to produce tax returns of a minimum of two recent years with all the correct schedules.
The factors that play a vital role in the approval of mortgage for self-employed borrower include the stability of income of the borrower, nature, and location of the business, the demand of service and product offered by the borrower’s business, financial strength, and the ability of the borrower’s business to continue generating sufficient income so that borrower is able to repay the mortgage.
If you suspect that the situation is difficult in order to get a conventional mortgage, then below mentioned are two options for self-employed borrowers.
Stated Asset Mortgage
The basis of this mortgage is the income that you describe the lender without any formal verification. These loans are also known as low-documentation loans as in these loans; the lender only verifies the source of income and not the amount. In this case, you should be ready to render the details of your recent clients, and other sources of income like income-producing investments.
The bank also asks you to fill an IRS Form 8821 or 4506. Form 8821 allows the lender to examine the forms that you have designated for the specified years by directly visiting the IRS office. The use of form 4506 is made to request a copy of a tax return from the IRS directly, which restricts you from submitting falsified returns, and it costs around $50 per return.
In this loan, the lender does not look for verifying your income information. It might be a good option if your tax returns show a very low profit or loss in business. It is quite riskier for the band to render a mortgage to someone having an unverified income. In these types of loans, you can expect your mortgage interest rates to be high as compared to the full documentation loans. No-documentation and low-documentation loans are known as Alt-A mortgages, and in terms of interest, they fall in between subprime and prime loans.
After checking the mortgage application, a lender usually provides you one of these three decisions: preapproved with conditions, denied, or preapproved. In the situation of preapproved with the condition, you might be asked to render extra documents to reduce your DTI ratio by making payment of some credit accounts in order to satisfy the condition of the lender. In case you are denied, the lender will explain to you why it has been denied and will also render you resources regarding how to tackle the issues.
In many cases, the borrowers need to work hard in order to boost the credit score and remove a spotty history of payment. Once you are aware of what you need to address, you can make efforts to enhance your credit score and financial health in order to get a better mortgage deal. It can help you in saving remarkable money on the pricing of a mortgage. It can also help in ensuring that you get lower rates of interest when shopping for different lenders.
If you are preapproved for the mortgage, then the lender will render you a preapproval letter on the official letterhead. These documents help in showing that you are a genuine and serious buyer. In addition to this, the documents also help in verifying that you have adequate financial means to make an appropriate offer to purchase the house. Most sellers expect that the buyers should have a preapproval letter. The sellers prefer negotiating with people who prove that they can attain financing.
The preapproval letters usually include loan program, loan amount, interest rate, purchase price, expiration date, down payment amount, and address of the property. The letter is finally submitted with the offer. Some sellers might also ask you to provide your asset and bank statements.
Getting a preapproval does not require you to borrow a loan from a particular lender. When you are finally ready to make the offer, you can select the lender that has the best terms and rates for your requirements. In addition to this, attaining a preapproval does not guarantee that you will also be approved for the mortgage, specifically if your income, employment, and financial status change during the preapproval and underwriting time.
In order to find the best deal, you should go through the process of a preapproval with varied lenders to shop interest. In addition to this, keep in mind that you will have to shop for a mortgage from the lender within 45 days. All the credit checks included in the process as one hard inquiry, and they create minimum impact on the score of your credit. In addition to this, if you are planning to think about homeownership, the process of preapproval can help you in getting your finances and credit in better shapes for the right time.
Now the question is can you be denied a loan after preapprval? The answer is Yes. Keep in mind that mortgage preapproval does not guarantee you the allotment of a loan. Preapproval letters are conditional on employment and financial information being consistent and truthful before the closing of your loan. In case if you fail to disclose the prime information – an IRS tax lien, a divorce, or some other problems, and if the underwriters find out these details later, you can attain the denial for your loan.
Consulting with a lender prior to the process of homebuying can save a lot of hassle later, It is better to collect the paperwork before the appointment of preapproval and definitely before you go searching for a house.