9 Things to Know About Mortgage Pre-Qualification and Pre-Approval
Over 5.5 million homes were sold in 2018.
Purchasing a home is a more stressful process than many people imagine. To reduce home buying stress, it’s important to be prepared. To avoid a common financial pitfall of falling in love with a home you can’t afford, it’s vital to get pre-approved or at least pre-qualified for a mortgage.
Getting pre-qualified gives you a superficial estimate of what you can afford, whereas a pre-approval will tell you exactly how much a lender is willing to loan you based on your income, credit score, and other documentation.
Pre-approvals speed up the mortgage process once your offer is accepted since it is completed in advance. Pre-approvals also, make your offers more competitive!
What exactly is needed to get pre-approved for a mortgage?
Read on to learn more about mortgage prequalification so that you can prepare to confidently fall in love with your dream home.
9 Ways to Prepare for Mortgage Prequalification
Purchasing a home is a life-changing experience. If you’re ready to purchase a home in the next two to three months, then it’s time get pre-approved for a home loan. Explore the following nine ways to obtain the best mortgage prequalification.
1. Improve Your Credit
You might think having a sizeable down payment and current income is enough to land the home of your dreams, but your lender might disagree if you have poor credit.
Your credit score demonstrates to a lender your history of paying bills on time, your debt and resulting debt payments, and your loan history. These factors let the lender know how much of a risk you will or won’t be as a borrower.
Lenders want to make sure that you’re a risk worthy of taking. Since they are granting you a line of credit, they will reasonably expect you will be able to pay them back in a timely, punctual manner.
First, pay off any debt that went to collections, continue making payments on time for bills and debt payments, and reduce your debt and credit usage.
2. Shop Around
Shop around for the best lender, rates, and mortgage terms. Research potential lenders’ reputation and availability.
If you’re a first time home buyer, bring along someone who has more experience with mortgage lenders. Someone who has purchased a home before will know what questions to ask a lender such as the current interest rates, fees, and documentation needs.
Avoid getting pre-approved by multiple lenders unless it’s within a one-month timeframe. When lenders pre-approve borrowers for a loan, they conduct a hard credit check which negatively impacts your credit score. If multiple inquiries occur within the same month, however, it only registers as one hard credit check on your credit score.
Getting pre-approved for a mortgage requires multiple forms of documentation.
Most lenders need your W-2’s, tax returns, pay stubs, and recent bank statements. Your bank statements will show your lender the exact amount of your down payment as well as any recent large transactions. Be prepared to explain any and all bank transactions as well.
Your lender will also need a copy of your social security card and driver’s license. You will also need to sign paperwork granting your lender permission to pull your credit score.
Some lenders might even contact your employer to verify your employment status. Alert your employer of this possibility to ensure the pre-approval process moves forward smoothly.
4. Increase Your Down Payment
Generally speaking, the higher your down payment, the more a lender will allow you to borrow. Work on increasing your down payment to also avoid higher interest rates. To get the best interest rates, you’ll want to at least have a down payment of 3.5% of a home’s purchase price.
An ideal down payment is 20% of the total cost of the home you want to purchase. By putting down 20% you avoid paying personal mortgage insurance. Personal mortgage insurance or PMI grants a lender added insurance and capital in the event you default on your loan.
If you can’t afford to a 20% down payment, then expect to pay for personal mortgage insurance which will be added to your monthly mortgage payment. Some loans also require a PMI payment upfront in addition to monthly installments.
5. Research Loan Types
The most common mortgage loan types are FHA and conventional loans. Conventional loans typically require higher down payments, but also grant you a lower interest rate and lower personal mortgage insurance rates. To qualify for a conventional loan, however, you must have a credit score of 620 or above.
FHA loans typically help lower-income borrowers with lower credit scores to secure a loan. However, most FHA loans still require a 3.5% down payment if your credit score is 580 or higher. If your credit score is lower than 580, then your lender may require you to pay a 10% down payment.
FHA loans also require you to have personal mortgage insurance for the duration of the loan. With a conventional loan, however, you’ll only need PMI for payments made which equal 22% of the total purchase price of your home.
One benefit of an FHA loan over conventional loans, however, is they allow for 100% of your down payment to be a gift. Conventional loans only allow for a portion of a down payment to be a gift.
6. Beware of Extra Fees and Expenses
In addition to your down payment, also allow room in your budget for underwriting fees, inspection fees, and other expenses such as one year’s worth of property taxes. Thoroughly discuss these additional fees with your lender in advance to get an accurate estimate of how much the home will actually cost upfront. Doing so will avoid any additional stress when the fees start to add up unexpectedly.
7. Shop for Homeowner’s Insurance
During the pre-approval process, begin to shop around for homeowner’s insurance. In order to secure a mortage, your lender will need to verify that you have homeowner’s insurance. Shop around in advance so that you aren’t caught off guard during the official loan approval process which occurs after you receive an accepted offer.
8. Limit Spending
Once you obtain a pre-approval, limit your spending. Avoid adding any more debt such as purchasing a car. Doing so will change your debt to income ratio which lenders use to approve you for a certain loan amount.
Respond promptly to your lender’s requests and communicate frequently. Your lender can provide you with a pre-approval letter for each home you want to put an offer on, so make sure to communicate with your lender about each potential offer.
At that time, your lender can also let you know if the home meets the loan qualifications and how much of a down payment you’ll need to secure a loan for this particular home.
Gain More Confidence Through Mortgage Prequalification
The most important asset you will gain through mortgage prequalification is improved confidence and knowledge about the home buying process. Even if your first offer doesn’t get accepted, you’ll pre-approval will still be active for 60 to 90 days depending on your lender.
Your lender and your realtor will both be closely intertwined in the home buying process, so make sure to choose wisely and stay on top of the pre-approval process.
If you live in the Washington D.C. area and need a dependable realtor, contact us today. We are an experienced and effective real estate agency ranking #1 in the Washington D.C. metropolitan area for volume and units sold.