Several steps in the home-buying process can make things run more smoothly for everyone involved. One step that is commonly overlooked is the process of getting a mortgage pre-approval before submitting offers.
As the real estate market continues to heat up, homebuyers should get pre-approved before ever touring their first property. This gives you a better idea of your exact price range and allows you to make a concrete offer when the right home presents itself.
What Is A Mortgage Pre-Approval?
A mortgage pre-approval is a document issued by a lender stating the amount a homebuyer would be able to borrow when purchasing a property. The pre-approval process verifies the potential homebuyer’s income, credit score, assets, and more to determine if they are eligible for a home loan. Lenders will then estimate the necessary down payment, loan amount, and interest rate for homebuyers when shopping for properties.
Why Get Pre-Approved?
The pre-approval process is crucial for homebuyers because pre-approval letters go a long way when buyers are ready to make an offer on a home. These letters demonstrate to real estate agents and sellers how serious you are about buying a property. Here at Maya Sells LA, we require pre-approval letters before starting a home search.
Pre-Approval Vs. Pre-Qualification
A mortgage pre-approval and pre-qualification are somewhat similar, and you may hear these two terms used interchangeably at times. However, there is one significant difference that will make an impact when it comes time to submit offers: a pre-qualification does not require a hard credit check. Pre-qualifications require less information than pre-approvals and only review your income and debts. At the end of a pre-qualification, you will receive an estimated loan amount, but no documentation showing your eligibility.
Pre-Approval Vs. Approval
A pre-approval occurs before you submit an offer, but you will need final approval to purchase the house. Note that obtaining a pre-approval does not lock in your loan terms. Lenders will request information about the property before approving the final loan. They typically want to know the following details:
- Title Status: The lender will request a title search to make sure there are no ownership claims or tax liens against the property.
- Appraisal Value: The appraisal value needs to be verified before lenders approve the final loan. They want to make sure the appraisal price is not lower than the purchase price — as this could suggest a bad investment on their part.
- Property Condition: There are certain loan types, such as an FHA loan, that require the property to be in good condition. This essentially means there is no structural or roof damage, which could jeopardize the final loan approval.
When To Get A Mortgage Pre-Approval
It is a good idea to get a mortgage pre-approval right before you start shopping for homes. These letters are typically valid for 60 to 90 days from the time they are issued. Homebuyers should apply before they want to tour properties and submit offers.
What Factors Affect Mortgage Pre-Approval?
Several factors can impact your application when getting pre-approved. It is important to review the information lenders want to make sure you are in good financial standing. Here are a few factors that affect mortgage pre-approval:
- Income and Employment: You need to be able to prove that you have a stable income and employment history. Lenders want to verify your salary and see one to two years of W-2 forms. They may also request bank statements and contact information for your employer.
- Debt to Income (DTI) Ratio: This ratio shows your debts in relation to your regular income. Debts include any outstanding medical bills, car loans, student loans, or other lines of credit. Most lenders want to check that you have a DTI at or below 43 percent before approving a mortgage. Your DTI will also impact your interest rate.
- Credit History: Lenders require a hard credit check to verify the number of credit lines you have open and to review your payment history. They want to see a history of making payments on time and verify how much credit you are currently using. The exact credit history requirements will vary based on your lender and loan type, but this will often impact the required down payment.
- Loan-to-Value (LTV) Ratio: The LTV is essentially the mortgage amount in relation to the property value. While you may not know the exact purchase price, lenders will typically ask how much you can submit as a down payment to determine the LTV. The LTV will determine whether you are required to pay private mortgage insurance.
How To Get Pre-Approved For A Mortgage
The pre-approval process will require you to contact a potential lender and submit the necessary financial information. Maya Sells LA can recommend several established lenders for you to use.
The following steps will guide you through the preapproval process:
1. Supply Documentation
The first step in the pre-approval process is filling out an application with your lender. The lender wants to verify all of your financial details before approving a loan amount. To do this, you will need to supply several documents, including:
- A Form of Government-Issued ID (passport, driver’s license, etc.)
- Pay Stubs or Proof of Income
- Bank Statements
- Two years of W-2 Statements or Form 1065 for self-employed applicants
- Income Tax Returns
- Asset Account Statements (any investment reports or retirement account totals)
- Gift Letter, if the down payment is being supplied by a relative
2. Agree To A Credit Check
Applicants will also need to supply a social security number and agree to a credit check. It is a good idea to review your credit history and score before submitting your application. This will give you a better idea of any potential areas for improvement. A hard credit check will impact your credit history, so buyers typically want to avoid applying more than once.
3. Receive Pre-Approval Letter
Once you submit all of the supporting documentation required for your application, lenders will issue you the official pre-approval letter so that you can move forward with the home-buying process. Once you receive this letter, email it to us, and let’s get started making an offer on your dream home!