Mortgage Pre-Approval 2021

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What is mortgage pre-approval?

Mortgage pre-approval is the process of getting an estimate of the amount of funds you can borrow from a lender for your mortgage.

This estimate is based on your income, debt, assets, and credit history. Lenders can provide a letter informing you of the type of mortgage you’re eligible for, the monthly mortgage payment that you can afford, and what mortgage rate you can receive.

Pre-approval is extremely useful as it can first give you an estimate of how much you can afford, and it shows sellers that you are a serious candidate who has financing available.

Why should you get pre-approved?

There are 3 major reasons to get pre-approved:

  1. Home Affordability: Once you are aware of the amount you can afford, it will give you confidence in your search and you won’t have to spend beyond your planned amount. It will also ensure you are realistic and do not go for houses that you cannot afford.
  2. Closing Advantage: The lender will already have most of the financial information that they need from you making the closing process extremely streamline.
  3. Credibility: Sellers will be confident in your ability to finance the payment, this will help give you an edge over a buyer who does not have a pre-approved mortgage letter.

How To Get Pre-Approved For A Mortgage?

What documents are required for pre-approval?

The pre-approval process is basically a mortgage application where the lender does a deep-dive into your finances and ability to repay the mortgage. The following documents are required from you:

How long does mortgage pre-approval take?

Mortgage pre-approval is a relatively fast process that can be done within 3 business days. However, if you have a lot of debt, been bankrupt in the past, foreclosures or low credit score, it can slow down the process. If your finances are complex, then it can extend to over a month to get pre-approval.

When should you get pre-approved?

Pre-approval is essential in determining the range of homes you can afford and hence, it should take place very early on in the home buying process. You should get pre-approved as soon as you have decided that you want to purchase a home and are going to begin your search.

How does the credit score impact pre-approval?

Pre-approval requires a deep search into your credit score and history. This can result in your credit score dropping, however, it will not hurt your credit in the long-run. If you reach out to multiple lenders who all conduct credit checks within a certain period (45 days) then there is only one hard inquiry impact, rather than multiple.

How long does mortgage pre-approval last?

Pre-approval is not a one-time process that lasts for years, instead, the letter has an expiration date. Although it will vary from lender to lender, most lenders allow the letter to be valid for 60 to 90 days. If you have not found a home in that much time, you can go back to the lender for a renewal.

What factors impact pre-approval?

There are 4 major factors that can impact the estimate that you receive in your pre-approval:

  1. Debt-to-income (DTI) ratio: The DTI ratio looks at your monthly debt expenses as a percentage of your gross monthly income. A DTI ratio less than 43% is required for a majority of mortgage programs, which means less than 43% of your monthly income should be going towards debt repayments. A lower DTI ratio will result in a higher pre-approved amount.
  2. Loan-to-value (LTV) ratio: The LTV ratio is calculated by dividing the mortgage amount by the home value. The higher the down payment, the lower the LTV ratio. An LTV ratio of less than 80% can help you avoid private mortgage insurance (PMI).
  3. Credit score and history: A credit score determines your ability to pay back the debt that you owe. A higher credit score is better as you are seen as less likely to default on your repayments. A minimum credit score of 620 is required by most lenders, however, if your credit score is less than that, you can get an FHA loan which only requires a credit score of 500. Apart from FHA loans, you might also be eligible for VA loan or USDA loan with a lower credit score.
  4. Income and employment: Being employed with a steady income can greatly improve your chances of getting pre-approved. Lenders will look at your employment history along with your current income.

Frequently Asked Questions

What is the difference between pre-qualification and pre-approval?

Mortgage pre-qualification and pre-approval both aim to give you an idea about how much you can afford and the terms of the mortgage. However, the slight difference between the two is the depth and the amount of information the lender requires from you.

Pre-Qualification: In a mortgage pre-qualification, the lender will only need very basic information to give you an estimate of how much you can afford. Basic financials such as your credit score, the range of homes you are looking to buy, amount of down payment you have saved, monthly debt, and the type of loan you are looking to take (fixed, variable). No documentation is required at this stage.

Pre-Approval: In a mortgage pre-approval, you will need to provide all the required financial documents and information. You will need to also present supporting bank statements, tax returns, and pay stubs, along with all the information required in a pre-qualification. The lender will also run a credit check, and upon pre-approval, provide you with an offer in writing with a mortgage rate.

What is the difference between pre-approval and approval?

It is important to realize that a pre-approval does not guarantee you a mortgage, rather it starts the process and improves your chances when you have chosen the home. Approval is what is required when you have made a deal with the seller, where the lender will check your financials and will need to verify the property details:

  1. Home Appraisal: The lender will want to get an appraisal done to ensure that the appraised value is equal to or more than the listing price. This will show you that you are not paying more for the home as compared to its appraised value. If the appraised value comes below the final price, the lender can have issues with the mortgage.
  2. Title: The lender will also have to check with the title company to make sure there is no dispute regarding ownership.
  3. Home Condition: Certain mortgage loans require that the home meet property standards, for example, the FHA loan requires a thorough check of the property and home to ensure that property standards are met.

Can I get a mortgage pre-approval online?

Yes, you can get pre-approved online, where several lenders have platforms that can take all your details and documents online and determine your pre-approval estimate.

What is the mortgage approval letter?

When the lender has gone through all your information and reaches an estimate, they send you a pre-approval letter showing that they have verified your financials. This is important because:

  1. Real estate agents want to see the pre-approval confirmation before they start showing you homes in order to narrow their search.
  2. Home sellers will have more confidence in your ability to purchase the home when an offer is made.
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