If you are planning on buying a home in the near future, the first step should be talking to a Loan Officer (LO) and getting preapproved for a mortgage. This process can set the tone for your entire home buying experience, setting you up for ultimate success.
What’s a mortgage preapproval?
Applying for a mortgage preapproval means completing the initial steps required to get a home loan approved. When you go through this process, you will receive a preapproval letter from the mortgage company stating that the information required to qualify you for a home loan has been verified, and a mortgage has been preapproved.
This can help you stand out from other buyers when you are ready to make an offer. Listing agents and home sellers look favorably on buyers who come armed with a loan preapproved for a specific loan amount.
When you’re preapproved, the mortgage company has already gathered, checked, and confirmed information about your identity, your income, your assets, your debts, and your credit score. You’ve filled out an actual loan application, and may have even finished the underwriting process.
Basically, when you make an offer accompanied by a preapproval letter, the seller will have the security of knowing your mortgage is almost certain to gain final approval, and that the rest of the process (appraisals, title processes, and loan disclosures) can be completed quickly.
Once your preapproval letter is issued, you can confidently shop for a home within the budget you’ve been preapproved for. You can show your letter to sellers to prove you are a serious buyer, and that in-depth vetting of your ability to purchase a home has been completed.
Getting ready for your mortgage preapproval
You’ll need to have everything together in the way of information before you start the preapproval process. Since you’re doing all of the steps of an actual loan application, plan on handing over a lot of documentation to verify your submitted information.
Your Loan Officer will make sure you’ve provided everything required and that your loan application has been completed correctly. Then your information and documents will be authenticated, a hard credit report pulled, your ability to make the down payment confirmed, and your credit score and debt-to-income ratio (DTI) added to your complete application file.
Collect your documentation
All of your documents will need to be as current as possible; within the past 30 days is standard. You’ll need proof of identity, employment, and income, as well as a way to verify your assets and ability to make a down payment and monthly mortgage obligations. Bank statements, pay stubs, and tax returns will all need to be gathered in preparation for your preapproval.
Check your credit
You are allowed to check your credit once a year for free for all three major credit bureaus. If your credit score is 740 or higher, you’ll probably be able to qualify for some of the best interest rates on your mortgage. If your credit score is low, don’t give up, however. You can still qualify for a home loan even with a score in the low 500s. Take steps to address inaccuracies or dispute information on your credit report if you find that you have a poor score due to incorrect data.
Reduce your debt
Your DTI ratio is easy to figure out. Take your monthly gross income. Divide it by your monthly debt. Monthly debt includes recurring costs,like housing, a car payment, credit card bills, and personal or student loans. While it’s best to have a DTI under 38%, you can still find a path to mortgage approval with a DTI ratio as high as 50%. Pay off principal debt or ask to have payments lowered to shrink your DTI ratio.
By reviewing your credit report and DTI ratio in advance, you can find ways to improve both and help yourself qualify for a better interest rate. However, if your credit score is low, and your DTI ratio is high, the best plan of action may be to talk to an LO before making any changes to your finances or starting the preapproval process.
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