Mortgage Pre-Approvals Explained
Before a lender will give you a loan, they have to determine a number of things. They evaluate your income, credit score, debts, employment, and more to decide which loans you qualify for, the amount you can afford to borrow, and the interest rate you can get on that loan. This process is called getting pre-approved for a mortgage, and once it is complete you will receive a statement written by the lender that contains all the above information. This is the statement is good for anywhere between 60 and 90 days, and you can use this to prove to sellers that you are interested in buying the home they are selling. It will also give them the confidence that you will be able to get the financing to complete the purchase if your offer on their home is chosen.
Are all lenders the same?
Each lender will have different guidelines and loan qualifications, so don’t be afraid to shop around a little and compare them.
Does a pre-approval guarantee the lender will give me a loan?
No. Pre-approvals do not guarantee the lender will give you a loan, and they do not guarantee the rates estimated in your pre-approval letter. Even after they have given your pre-approval letter they may require more time to review everything more thoroughly, including more asset and income verification, if you decide to apply for a loan. The seller is also not guaranteed to accept your offer on their home if you have an approval letter. It is often used to be one step ahead of the other potential buyers in competitive markets, but it does not guarantee the seller will choose your offer.
What information will a lender ask for in the pre-approval process?
Lenders want to review your financial history to see what kinds of loans you qualify for and which mortgages you can afford, so they will normally ask for your Social Security number and review your basic information as well as your credit report according to the standards and qualification requirements that vary by each lender. Then if all the guidelines are met they will write out a statement related to which loans you qualify for and the conditions you would have to meet.
What is the benefit of getting a pre-approval letter?
The primary benefit pre-approval letters give buyers is an accurate estimate of which homes and mortgages they can afford. This makes the home search so much easier for both you and your real estate agent by filtering out homes that are not in your price range. Pre-approvals also prove your credibility to sellers and show them that you will act quickly on a home you are truly interested in. Occasionally seller will require pre-approval letters submitted with any home offers, but this doesn’t guarantee the offer will be accepted. In competitive markets, buyers who submit a pre-approval with their offer will oftentimes be chosen over offers without a pre-approval.
What happens if I can’t get a mortgage pre-approval?
In the event that you do not get pre-approved, there are still several other things that you can do to prepare you for a financial transaction as significant as a home purchase:
- Make sure any credit report errors are corrected. This will help raise your credit score, which is a major factor when determining home loans you qualify for as well as the interest rates on those loans. Look for things that a lender will notice like missed payments or late payments and make sure you get them back on track.
- Increase your credit score. This doesn’t happen overnight since your score directly reflects your payment history, new credit, and outstanding debts. You want to aim for a score of 720 or more to receive the best mortgage rates.
- Decrease your debt to reach a better debt-to-income ratio. The maximum debt-to-income ratio allowed by most lenders is 43% but 36% or less is better.
- If you want to qualify for a higher loan amount, consider saving more for an increased down payment. This will also increase your chances for a better interest rate among other benefits.