Mortgage Preapproval: Where To Start And What To Know

Getting a mortgage preapproval is a smart step to take when you're ready to put in an offer on a new home. It shows sellers that you're a serious buyer and that you can secure a mortgage, increasing your chances of having your offer selected. The process involves a comprehensive look at your finances and debt-to-income ratio (DTI) by a lender or loan officer. They will verify your income, employment, debt, and assets, and check your credit score to determine your eligibility. Before reaching out to a lender, it's advisable to check your credit score and report, as a higher credit score can help you qualify for better mortgage rates. Once you have all the necessary documentation, you can start researching lenders that may be a good fit.

Check your credit score and report

Before reaching out to a lender for mortgage preapproval, it is important to check your credit score and report. A higher credit score can help you qualify for better mortgage rates. Your credit score is an important factor in determining your eligibility for a mortgage and the amount you can borrow.

You can access your credit score and report from one of the three major credit bureaus: Equifax, Experian, and TransUnion. Review your credit report for any inaccuracies or discrepancies, as these can negatively impact your score. If you find any errors, take steps to correct them before applying for mortgage preapproval. Additionally, your credit score may be affected by your debt-to-income ratio (DTI), so focus on reducing your debt, especially high credit card balances.

It is worth noting that mortgage preapproval triggers a hard inquiry on your credit report, which can cause a temporary dip in your credit score. This is because lenders need to verify the information you provide and assess your financial capacity. However, this small decrease in your credit score is usually short-lived, and you can minimize its impact by obtaining preapproval from multiple lenders within a short time frame. Credit bureaus understand that you are likely comparing mortgage rates and offer a grace period, counting multiple inquiries as a single hard inquiry.

Checking your credit score and report in advance allows you to address any issues and potentially improve your score before applying for mortgage preapproval. This proactive approach can increase your chances of obtaining preapproval and securing a competitive mortgage rate.

Gather necessary documentation

When it comes to gathering the necessary documentation for mortgage preapproval, there are several key items you should be prepared to provide. This process is essentially a mortgage application, so your lender or loan officer will want to take a comprehensive look at your finances and debt-to-income ratio (DTI). Here is a checklist of documents you may need:

• Employment and Income Verification: Lenders will want to verify your income, so be prepared to provide documents such as pay stubs, W-2 forms, tax returns, or bank statements. If you are self-employed, you may need to provide additional documentation, such as profit and loss statements or 1099 forms.
• Financial Accounts and Assets: You will need to disclose information about your financial accounts, including bank statements, investment accounts, and retirement accounts. Lenders will also be interested in your assets, such as property or other valuable possessions, as these can demonstrate your financial stability.
• Debt and Credit History: It is essential to provide details about any existing debt you have, such as credit card balances, car loans, student loans, or other personal loans. Lenders will also review your credit score and credit report to assess your creditworthiness. Make sure to review your credit report beforehand and dispute any errors.
• Additional Documentation: If your financial situation involves other factors, such as divorce, rental income, or self-employment, you may need to provide additional documentation. For instance, if you are divorced, you may need to provide a copy of the divorce decree outlining any financial obligations.

Keep in mind that the specific documentation required may vary depending on the lender, so it is always a good idea to check with your chosen lender about their exact requirements.

Understand the difference between pre-qualification and pre-approval

Pre-qualification and pre-approval are both types of mortgage approvals. They are steps that lenders take to verify or get a sense that a client can afford a mortgage. However, they have distinct meanings and purposes.

Pre-qualification is a less involved step, with fewer verification steps. It is a lender's estimate of what you could potentially borrow. It is based on data you submit, such as your income and expected down payment. It can be completed easily and conveniently online, in person, or over the phone in just a few minutes. It is an opportunity to learn about different mortgage options and work with your lender to identify the right fit for your needs and goals. It is also a preliminary step to determine the size of the mortgage you could get.

Pre-approval, on the other hand, is a more specific estimate of what you could borrow from your lender. It is a conditional approval for the loan amount you will borrow. It requires more documentation, such as bank statements, pay stubs, tax returns, and your Social Security card. It also requires a hard credit check. Lenders will verify your financial information and credit history to determine exactly how much you can be preapproved to borrow.

While both have their purposes, pre-approval tends to be more useful for showing sellers that you are a serious buyer and that you can secure a mortgage, thus increasing your chances of having your offer selected.

Compare lenders and choose the right one for you

Comparing lenders and choosing the right one is a crucial step in the mortgage preapproval process. Here are some detailed tips to help you make an informed decision:

Research and Recommendations

Start by conducting thorough research on potential lenders. You can use online resources and recommendations from real estate agents or financial advisors. Look for lenders that offer the specific loan product you need, such as a mortgage loan. Check online reviews and testimonials from previous borrowers to gauge their reputation and reliability.

Interest Rates and Fees

One of the most important factors to consider when comparing lenders is the interest rate they offer. Contact at least three lenders to understand the range of mortgage rates available to you. Aim for five or more quotes to maximize your savings. Compare the interest rates, upfront fees, and closing costs. Remember that lenders structure loans differently, so ensure you understand the terms and conditions of each loan offer.

Preapproval and Prequalification

Understand the difference between preapproval and prequalification. Prequalification is a quick estimate of your borrowing potential, often done online or over the phone, and may not involve document verification. On the other hand, preapproval is a more thorough evaluation that requires submitting financial documents. While both give you an idea of your borrowing power, preapproval provides a more accurate assessment and carries more weight with sellers.

Credit Score Impact

Be mindful of the impact on your credit score when applying for preapproval with multiple lenders. Space out your preapproval requests within a specific time window, typically within 2-4 weeks, to minimize the impact on your credit score. Lenders perform hard credit inquiries, which can lower your score by a few points, so it's essential to manage the timing of your applications effectively.

Loan Estimates and Transparency

Obtain official loan estimates from each lender, detailing all terms, rates, fees, and points for the loan. Compare these estimates side by side to identify the best combination of interest rates and upfront costs for your financial situation. Be cautious of lenders who may try to mislead borrowers by strategically placing their fees and points to make their offer seem more attractive than it is.

Customer Service and Support

Consider the level of customer service and support provided by the lender. Choose a lender that offers guidance and assistance throughout the mortgage process. A good lender should help you understand the different mortgage options and work with you to identify the right loan product that aligns with your financial goals and needs.

Remember, there is no one-size-fits-all approach to choosing a lender. By following these steps and conducting thorough research, you can make a well-informed decision when selecting the right lender for your mortgage preapproval.

Prepare for lender questions

Lenders will ask you a lot of questions during the mortgage preapproval process, so it's important to be prepared. Here are some topics that lenders typically cover during this conversation, along with some guidance on how to respond:

Your employment situation: Lenders will want to know that you have a steady source of income to repay your loan. Be prepared to provide details about your current employment, including your job title, salary, and how long you've been with your company. If you're self-employed or have variable income, you may need to provide additional documentation, such as tax returns or 1099 forms.

Your credit history: Your credit score is a key factor in determining your eligibility for a mortgage. Lenders will likely ask about any

Frequently asked questions