A Comprehensive Guide to Secure a Home Loan Pre-approval
The most thrilling part of buying a house is the search for the perfect home. It can be difficult to navigate the plethora of options available. At the time, you need to have a realistic assessment and narrow your choices according to how much you can afford. It isn't necessary to buy the house out-of-pocket or out of your savings. You could apply for a home loan to get your property purchase off the ground.
If you are applying for home loans, it's recommended that you get pre-approved. Home loan pre-approval is a confirmation that a lender has assessed your financial situation and determined that you are eligible for a specific amount of loan.
What is a Home Loan Pre-approval?
A home loan pre-approval is a letter from the lender which outlines the amount you can get from them. It is important to note that this isn't a final loan agreement yet. It is merely a confirmation that you're eligible for the lender's home loan terms and that the loan officer has reviewed your financial situation (e.g. the amount of debt, accounts, income).
Along with an estimation of the amount you can borrow, the pre-approval letter could also specify your monthly payments and the loan interest rate. Once your home loan is pre-approved, you'll receive a written statement. It is possible to show this letter to property developers to assure them that you're already in contact with a lender and that the lender is open to lending you money.
Why Should You Get Pre-approved?
There are numerous advantages of having a mortgage pre-approval. Here are a few of them:
- You'll know the properties within your budget.
When you get your home loan approved, you'll know the amount .you can borrow. Therefore, you'll be able to concentrate on looking at properties that are within your budget. It's possible to let go of the penthouse you've been considering, however, it also means that buying a house is much simpler because you have narrowed down your options.
- You can organize your finances more effectively.
With a pre-approved home mortgage, it is easier to budget your money accordingly. Since you know the amount of loan you'll be able to get, it is possible to determine whether the amount is enough or you'll need to add more from your savings to secure the house you're looking at.
- Your credibility will increase as a purchaser.
A pre-approved mortgage can make you an attractive buyer to a seller because it indicates that you're committed to buying a condo, your financial situation is in order, and you'll have a lower chance be rejected for a home loan. It could give you an edge when it comes to negotiations.
- It will allow you to close deals more quickly.
Because pre-approval is the initial step to obtaining a mortgage, doing it earlier will help you get loans easier. Once you've identified the ideal property, you'll be able to present an offer in a shorter time and keep your property from being sold to other buyers.
Requirements for Pre-Approval
The mortgage pre-approved process requires the buyer to complete a mortgage application, and submit proof of assets, proof of income, good credit score, employment verification, and important documentation. Pre-approval is based upon the borrower's FICO credit score, debt-to-income ratio (DTI), and other factors dependent on the type of loan.
Except for jumbo loans, all loans conform with Fannie Mae and Freddie Mac guidelines. Certain loans are specifically designed for low or moderate incomes first-time homebuyers and homeowners. Other loans, such as Veterans Affairs (VA) loans do not require any downpayment from U.S. veterans and service members.
1. Proof of Income
Prospective buyers must submit the W-2 wage statements and tax returns from the last two years, the most recent pay stubs with the year-to-date income, and proof of additional income sources like bonuses or alimony.
2. Proof of Assets
A borrower's bank and investment account statements confirm that they have enough funds to settle a downpayment, closing costs, and cash reserves. The amount of the down payment, calculated in percentages of the selling price varies based on the loan type. Many loans require buyers to get a PMI or private mortgage insurance (PMI) if they do not put down a minimum of 20% in the acquisition price.
3. Good Credit
The majority of lenders require a FICO score of 620 or higher to approve the conventional loan or 580 for a Federal Housing Administration loan. They typically offer the lowest interest rates for those with a credit score that is 760 or higher.
4. Employment Verification
The lender will not just confirm employment by looking at a buyer's pay stubs, but they will also contact the employer to verify the borrower's employment and salary. Self-employed buyers also provide additional information like the reliability of the borrower's income, the location, the nature of the company, the financial stability of the company, and their capability to keep producing and dispersing enough income so that the borrower can make payments on the loan.
5. Other Documentation
The personal documents and ID required to be approved include the borrower's driver's license, Social Security number, and authorization for the lender to access the credit history.
Pre-Approval vs. Approval
A lender must submit a document referred to as a loan estimate within three days of receiving a mortgage application. It provides the pre-approved loan amount, the maximum loan amount, the terms and types of mortgage, interest rate, estimated interest, payments, closing costs, estimates of property taxes, and homeowner's insurance.
A loan would then be transferred to a loan underwriter who will ensure that the borrower complies with the requirements of the particular loan program to get full approval. If there is no change to the buyer's financial situation since approval, both the lender and the buyer may proceed with the closing of the loan. The final loan approval happens when the buyer receives an appraisal completed for the home, and the loan is applied to the property.
How Long Does Mortgage Preapproval Last
Preapproval has an expiration. Make sure you check the expiration date and remember it when looking at houses. Although it differs between lenders, preapprovals are generally valid between 60 and 90 days. If you're not yet able to settle on a house or property, you may get a new preapproval by providing your lender with your current financial and credit details.
What If You Don't Get Pre-Approved?
After reviewing the mortgage application, a lender will then make the option to approve, deny the application, or to pre-approve with conditions. The conditions may require the borrower to submit additional documents or reduce existing debts to meet guidelines for lending. If the loan is denied, the lender should provide reasons and provide options to increase the chances of a borrower getting pre-approval.
What are the factors considered for mortgage pre-approval?
In addition to assessing your credit score, lenders verify your employment status and income. They'll also consider your debt-to-income ratio (DTI) which is the sum of your monthly debts divided by monthly income. This ratio, expressed in percentage, can help lenders ensure that you have the income to cover your obligations. The DTI required to get mortgage approval is different for each loan type. However, you'll need your debt-to-income ratio to be at least 50% or less.
The Bottom Line
The mortgage pre-approval process is an assessment of a buyer's financial situation, and lenders require five items to make sure that borrowers can repay their loans. Prospective borrowers fill out an application for a mortgage and submit proof of assets, proof of income, a credit report, employment verification, and essential documents to get pre-approval.
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