If you’re thinking about owning a home, you’ll likely need a mortgage preapproval. A home loan preapproval gives you a snapshot of what you can afford based on the program you apply for. Show
A preapproval letter shows sellers you’re solid financially, and if there’s a lot of competition for homes in your area sellers won’t consider your offer without one. Knowing the ins and outs of a mortgage preapproval will give you the edge you need to compete against other less prepared homebuyers.
Things to know first→ Knowing how to get preapproved for a mortgage gives you an edge before you start house hunting → Many sellers won’t consider an offer without a mortgage preapproval letter → There’s a big difference between a prequalification and a preapproval → Make sure you pick the right loan type for your mortgage preapproval → Have your financial paperwork ready before you apply for a preapproval → Learn what steps to take if you’re denied for a preapproval What is a mortgage preapproval?A mortgage preapproval is a preliminary green light from a lender for a home purchase based on a review of your credit, debt, income and down payment funds. Lenders typically issue a preapproval letter detailing the maximum amount you can borrow based on the loan program you apply for. Prequalification vs. preapprovalLenders and real estate agents often use the terms prequalification and preapproval interchangeably, but there are important differences. Getting prequalified for a mortgage is based on casual conversation about your credit scores, earnings, monthly debt payments and the source of your down payment (if needed). The lender relies on information you provide without vetting it with financial documents and, in some cases, without pulling a credit report. With a mortgage preapproval, the lender usually requires you to complete a loan application and provide basic financial documents like pay stubs, W-2s and bank statements. The lender will also pull a credit report from the three major credit bureaus — Equifax, Experian and TransUnion — to see how you’ve managed credit over time. How to get preapproved for a mortgageAlthough you can get a mortgage preapproval online, you’ll still need to gather some financial documents to apply for a home loan. Generally, you’ll need to provide:
You may need additional paperwork to document any unique income, credit or application issues such as:
Self-employed borrowers: Different rules applyIf you have 25% or more ownership in a business you earn income from, you’re considered a self-employed borrower, and will have to provide more paperwork to get a mortgage preapproval. Because your income isn’t guaranteed, lenders take extra care to make sure the income is stable enough to repay the loan. Lenders that offer self-employed mortgages typically average the personal earnings reported on tax returns for the last two years. They often analyze business tax returns to make sure the company is stable, and may require profit and loss statements and letters from a CPA to explain how your income is received. When should you get a mortgage preapproval?You should get a mortgage preapproval if you’re serious about looking for and making an offer on a home within the next two months. Preapproval letters are good for 30 to 60 days, according to the Consumer Financial Protection Bureau (CFPB). If it takes you longer than a month or two to find a home, the lender may need to update your preapproval with more recent pay stubs and bank statements. If your house hunt takes more than 90 days, the lender may also need to pull a new credit report, which may impact your credit score. How the mortgage preapproval process worksThere are five basic steps in the mortgage preapproval process.
How long does a mortgage preapproval take?Some lenders offer same-day mortgage preapprovals that include electronic verification of your employment, credit and assets. Others may take several days, depending on how complicated your financial situation is. Ask lenders upfront what their timelines are. Expect a longer wait if you have credit bumps or are self-employed. What factors lenders consider when granting your mortgage preapprovalLenders scrutinize all of your financial decision-making, from how you’ve managed credit to how stable your income is. Here’s a brief overview of the most important mortgage preapproval factors:
Different types of mortgage preapprovalsThere are four standard loan programs offered by most lenders: conventional, FHA, VA and USDA. Here’s a brief overview of mortgage preapproval requirements for each one: Conventional mortgage preapprovalConventional loans are the most popular option, although they have more stringent requirements set by Fannie Mae and Freddie Mac than government-backed loans offered by the FHA, VA and USDA. A conventional mortgage preapproval is a good option if:
FHA mortgage preapprovalThe Federal Housing Administration (FHA) insures FHA loans for borrowers with lower credit scores and higher DTI ratios. The extra credit flexibility comes with hefty FHA mortgage insurance expenses. The upfront lump-sum mortgage insurance premium fee of 1.75% is added to the loan amount, along with an annual mortgage insurance premium fee of 0.45% to 1.05%, which is divided by 12 and added to your monthly payment. An FHA mortgage preapproval is a good option if:
VA mortgage preapprovalThe U.S. Department of Veterans Affairs (VA) guarantees loans made to retired and active-duty military borrowers, reservists and eligible surviving spouses. VA borrowers with enough VA entitlement may buy a home with lenient credit requirements and no down payment. No mortgage insurance is required. Instead, a VA funding fee of 1.4% to 3.6% is charged based on your down payment and whether you’ve used your home loan benefits before. A VA mortgage approval makes sense if:
USDA mortgage preapprovalThe U.S. Department of Agriculture (USDA) guarantees loans for low- to moderate-income homebuyers in rural areas defined by the USDA. Borrowers can obtain no-down-payment financing, but pay two types of guarantee fees that work much like FHA mortgage insurance. A USDA mortgage approval makes sense if:
Below is a snapshot of the minimum mortgage preapproval requirements for all four of these programs. *Some exceptions may be made for borrowers with higher DTI ratios who also have ample cash reserves, residual income or other mitigating circumstances. Mortgage preapproval vs. final loan approvalOnce you get your mortgage preapproval, your lender takes steps to get you to the final loan approval process, which typically includes:
What do I do if I’m denied for a mortgage preapproval?The first thing to do is find out why your loan application was turned down. The most common reasons for home loan denial are high DTI ratios or low credit scores. Here are some tips for turning a mortgage denial into a mortgage preapproval. If your DTI ratio is too high you can:
If your credit scores are low you can:
Alternative mortgage preapproval optionsIf none of the tips above work to get you a standard loan, your loan officer may suggest an alternative or “non-QM” home loan product. Short for non-qualified mortgages, these mortgage programs offer temporary lending solutions. One caveat: You’ll need a bigger down payment and should expect to pay a higher rate for these types of loans. Some of the most common non-QM loan types include: Stated income loans. Instead of tax returns, lenders allow you to “state” your income and support it with 12 to 24 months’ worth of personal or business bank statements. No-doc loans. These loans catered to investment property buyers rely exclusively on the estimated rental income to qualify. Asset depletion loans. High net worth borrowers may be able to convert the cash value of an asset into income. Recent major credit issue loans. Borrowers with large down payments and solid income may be able to take on a non-QM loan one day after completing a bankruptcy or foreclosure. Standard loan programs require a two- to seven-year waiting period. FAQs about mortgage preapprovalCan I get a mortgage preapproval without a credit check?No. However, you can get a mortgage preapproval without a credit score if you can show you’ve paid other obligations such as rent, car insurance, utilities and other accounts on time. How long does a preapproval take?It may take several minutes to several weeks to get a preapproval, depending on your financial situation. Ask your loan officer what their standard preapproval turnaround times are when you’re shopping for a lender. How much does a preapproval cost?In most cases, getting a preapproval should be free. Some lenders may charge an upfront application or credit report fee. Make sure you ask about upfront fees when comparing lender quotes. Should I get preapproved for the maximum I qualify for?Yes, if you’re in a highly competitive market. Use a home affordability calculator to get an idea of how the payments will look based on different loan programs and down payments. Can I get preapproved online?Yes. Many lenders offer fully digital online mortgage approvals, and may even be able to access your employment, income and asset information with the click of a button. Should I get preapproved by multiple lenders?The CFPB recommends applying with several lenders and comparing options. However, once you find a home, you’ll need to make a final decision and stick with that lender until closing. Will getting preapproved with multiple lenders hurt my credit score?The impact to your credit score is limited, as long as the applications are made within a 45-day window. One other tip: Don’t apply for any new credit while you’re house hunting. Lenders will pull your credit again before your loan closes, and new debt could turn a mortgage preapproval into a denial. Does preWhen you're pre-approved for a loan, it means the lender provisionally agrees to lend you the money, based on the preliminary information you give them. It doesn't mean you are guaranteed to get the loan. Final approval for the loan will be subject to a hard credit check and other final checks.
Can a loan be denied after preCertainly the hope is the if a lender pre-approves a buyer that the buyer will successfully obtain the financing, however, it's possible a mortgage can get denied even after pre-approval. A mortgage that gets denied is one of the most common reasons a real estate deal falls through.
What to Do After Getting preapproved?Find a home and make an offer
Now that you've been pre-approved, it's time for the fun part: house hunting. After visiting properties with your agent and picking out the home you want, it's time to make an offer. Your real estate agent will know the ins and outs of how to structure the offer.
Does preA prequalification or preapproval letter is a document from a lender stating that the lender is tentatively willing to lend to you, up to a certain loan amount. This document is based on certain assumptions and it is not a guaranteed loan offer.
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