How to Start the Mortgage Pre-Approval Process
You don't have to be pre-approved for a mortgage to buy a house. But it's smart—especially in a seller's market—to be: A pre-approval means that a lender has already determined that you're qualified to borrow the money needed for a mortgage, which puts you in a better position to act quickly on a house that you love. In turn, that makes you a more attractive buyer to a seller, experts say. "If you're serious about buying a home, having a pre-approval letter in hand will let the seller know that you've done your due diligence, and your credit and income qualify you to purchase the home," says Mary Babinski, senior loan originator for Motto Mortgage Champions. In fact, many real estate agents won't even take you to look at homes unless you've been pre-approved.
Here's everything that you need to know to start the pre-approval process.
Find the right person.
Pre-approvals can come from a bank loan officer or a mortgage broker: A loan officer will work with his or her institution's offerings, while a mortgage broker will "shop around" for mortgage loan options. Each has its benefits and drawbacks, and "the choice of mortgage professional is a personal one and won't be the same for each and every buyer," says Babinski. Weigh whether a loan officer or mortgage broker would be right for you, and talk to your realtor and homeowner friends for their recommendations. Then, "consider meeting with both types of professionals to ask questions before making the choice of mortgage broker versus loan officer," Babinski says.
No matter which you choose to work with, "a good mortgage professional will take their time to share valuable and educational information with you," she says. You can should also take time to read reviews of the professional online. "It's vital you feel you can trust them, and are comfortable discussing your personal finances and home purchase goals with them," she says.
Consider your budget.
You can set yourself up for pre-approval success by determining how much you'd like to spend on a house and on a monthly mortgage payment before applying for pre-approval. Run through the numbers with your mortgage professional, and talk candidly about how much of your liquid assets you'd like to spend on a down payment and closing costs, Babinski recommends. "Closing costs and down payments vary [by person] and loan product," she says, "so having an idea about how much you are prepared to spend is wise" and can save you time, effort, and even heartache.
Familiarize yourself with your credit score.
That three-digit number will determine a lot when it comes to what you can borrow. "Not only is credit an important factor in whether you'll get approved for a mortgage, it also helps determine the terms of your mortgage," says Christine Alize Santos, branch manager at Silverton Mortgage. For example, the lower your credit score, the higher your interest rate will be. If you know your score is low before you apply, you can work to raise it. Doing so will ultimately save yourself money.
Gather the right documents.
A mortgage professional will need to figure out your income to debt rations to help you find the best mortgage loan—and to do that, they'll need several documents. No matter what your situation, Santos says you should be prepared to give your mortgage professional up to two years of tax returns, several months' worth of pay stubs, and W2s as proof of your income. Lenders will also want to see your bank and investment statements. And they'll pull your credit score.
If you're a renter, you'll need to provide proof that you've made timely rent payments. And if a family member is helping you with your down payment, you'll need to present a letter detailing the gift. (The mortgage professional will need proof that the gift is not really a loan, Santos says.) A mortgage professional will also need information about any debts you have, from car loans to student loans to credit card debt. It may seem like a lot, but "all this information is necessary for your mortgage professional to determine how much you can really afford," Babinski explains.
If you're not sure whether a document is needed, bring it to your professional anyway. "Having as much information as possible available will save you time and help the entire process go much smoother," Santos says. "While the exact documents that lenders need vary, assume that anything that helps prove that you can make your mortgage payments on time will be helpful."