Getting a mortgage pre-approval can put you ahead of other buyers and speed up the mortgage process, helping you secure your dream home. Here are the essential steps to the mortgage pre-approval process.
Difference Between Pre-Qualification and Pre-Approval
It is critical to understand the distinction between pre-approval and pre-qualification because they are not the same.
With a pre-qualification, you provide an overview of your finances, income, and debts to a mortgage lender who then gives you an estimated loan amount.
This is great if you want some general insight of your finances to determine what you can afford.
However, the lender doesn’t pull your credit reports or verify your financial information.
Pre-approval, on the other hand, requires you to complete an official mortgage application to get pre-approved, and you must supply the lender with all the necessary documentation to perform an extensive check on your financial background and current credit rating.
You can expect a more specific (but not necessarily final) number on the potential mortgage and its interest rate.
Steps of the Pre-Approval Process
Getting pre-approved for a mortgage is a fairly simple process. You will need to bring five kinds of documentation:
Proof of Income
The bank will ask you for proof of income from the last two years through your W-2 statements and pay stubs, which will give lenders detailed information of your finances. This is important because the bank wants to have a clear idea of your ability to pay off your mortgage loans if approved.
Second, your lender will request bank statements, as well as account statements for your investments to get a sense of whether or not you have the funds to manage your down payment and other costs associated with the transaction.
The amount of cash reserves varies depending on your source of financing, but you can expect around 5%-20% of the cost of the home.
The bank will then take a look at your credit score to determine the interest rate you will have to pay on your loan. Those with higher credit scores can expect to pay a lower interest rate than those with lower credit scores.
If your credit score is not up to par, you may have to make a larger down payment as well. It’s important to make sure your credit is in good standing to avoid paying more fees and interest rates than necessary.
Proof of Employment
You will also need to prove you have stable employment. The bank will likely call your employer to confirm you work there (and still are) and to double-check your overall salary. Additional paperwork is required for those who report as being self-employed.
Finally, be prepared with your vital government documents such as your Social Security number, a copy of your driver’s license, and your signature to facilitate other checks and appraisals by the bank.
If the bank finds everything to be in order, you’ll receive a letter of pre-approval good for roughly two to three months (60 to 90 days).
The best way to get the ball rolling for your mortgage pre-approval is making sure you are readily and efficiently supplying the documents and information requested by the bank or your lender in order to expedite the process of securing a mortgage.