How to Get a Mortgage Pre-Approval
It’s easy to find a home you love when you’re looking online and budget is not a factor. But, in all likelihood, you’re going to need a mortgage to finance your purchase. Getting a mortgage pre-approval early in your process can help you find a place you not only adore but also can afford. This article shares the basics for homeowners about how to get a mortgage pre-approval.
A mortgage pre-approval letter documents a lender’s preliminary assessment of how much money they are willing to lend you for a home purchase. Lenders take into consideration several factors about your finances to determine what amount of money might be available to you. This is a non-binding document. Yet it helps to demonstrate to agents and home sellers that you’re serious about buying a home.
Keep in mind, though, a pre-approval could be at the absolute top of your budget for a new home. Just because a lender is willing to give you $1 million doesn’t mean that it’s necessarily a good idea for you to buy a house at the price point. Consider your other financial goals as well (e.g. retirement, vacations, college funds).
Getting pre-approved for your mortgage before finding the home you want provides you with peace of mind, says our preferred lending partner Highland Mortgage. The pre-approval gives you information about loan options and interest rates, which can also help you choose the best mortgage (and lender) for your needs.
With a pre-approval in hand, you can search for homes with greater confidence that you understand your budget. You’ll also have increased negotiating power as a pre-approval helps you distinguish your offer to a prospective seller.
Having a pre-approval also gives you a head start on the mortgage application process. You’ll already have answered some of the credit questions, which can help you close faster. Plus, “quicker closing times are more attractive to most sellers,” Highland notes on its pre-approval page.
Typically lenders will ask for the following to determine your pre-approval amount:
Lenders use these documents to determine your debt-to-income ratio. By dividing your monthly gross income by your monthly debt payments, a lender can gauge how much money you can reasonably plan to repay.
They’ll also check your credit score. A higher credit score will typically earn you better financing terms.
No, a pre-approval is only an estimate. For starters, it’s based on self-reported information. So, when it comes to setting up the mortgage, you can expect much more rigorous review of your documentation.
Not maintaining the financial position you reported when applying for the pre-approval could make it challenging to get the necessary funding. For example, if you lose your job or buy a boat while house hunting, that could negatively impact your borrowing power.
Additionally, when you apply for the mortgage, you are doing so based on a specific property. In this case, the lender will expect a property appraisal. If the appraised value is significantly lower than your negotiated purchase price, that could impact your mortgage approval. Structural problems or other home issues discovered during the inspection could also hamper your approval.
The pre-approval usually doesn’t guarantee your interest rate either. If the rates change while you are looking for your home, it will impact the actual terms of your mortgage.
Know also that your pre-approval has an expiry date. A lender will typically offer you those financing terms for a 60- or 90-day period. If your pre-approval expires, don’t worry. You can apply again, for free with most lenders. If a lender does charge a pre-approval fee, they’ll often deduct it from your closing costs if you select them for the mortgage.
However, if your house hunt stretches over many months, the applications could have an impact on your credit score. Some lenders carry out only a “soft credit inquiry” for pre-approval purposes, but others do a “hard credit inquiry,” which can count for five points against your credit score. Note: when you apply with multiple lenders at the same time to compare prices, it will count as only one hard inquiry.
Getting at least three pre-approvals is generally recommended. Applying for pre-approval with multiple lenders lets you compare offers and find the most favorable terms for your purchase. To find the most affordable loan, look at the interest rates, loan amounts, origination fees, and other upfront closing costs.
When you get a mortgage pre-approval you’re taking an important first step in the home buying process. It is non-binding, which means the terms can change, but you’ll have a better idea of your budget. Plus, it helps you demonstrate your ability to get financing. Once you’re pre-approved you can focus your attention on the search for your forever home.
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