How To Get A Home Loan Pre-approval

Pre-approval is a document that provides an accurate idea of how much you can borrow to buy a home. It also shows real estate agents and sellers that you’re a serious buyer.

In a competitive housing market, not only are buyers more likely to accept your offer when you include a pre-approval letter, they might require one. Buying agents are also more likely to be willing to work with you. Everyone involved wants to make sure that investing time in your home search won’t lead to an offer that falls through.

Pre-approval is not a guarantee you’ll get a loan, but it provides a good foundation for your home search. And it keeps your financial and personal information handy so you can be efficient when you’re ready to make an offer. 

Here’s how to get started with the pre-approval process:

Gather your financial documents
Lenders will want verify your ability to pay back your loan, so they’ll ask for the following:

        ▪︎  W2 statements from the last 2 years
        ▪︎  1099s from the past 2 years (if you have them)
        ▪︎  Pay stubs from the last 3 to 6 months
        ▪︎  Bank statements from the last 2 years
        ▪︎  Driver's license or identification card
        ▪︎  Social security number or individual taxpayer identification number
        ▪︎  Investment account statements from last 2 year
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Check your credit score
Your credit score is one of the most important considerations when a lender decides whether to approve your loan and on what terms. Each lender will require a minimum credit score—many require 620 or higher.

Completing a pre-approval application can reduce your credit score by a few points, so it’s a good idea to get a free credit report that will give you an idea of your score but not impact it negatively. The Fair and Accurate Credit Transaction Act, or FACTA guarantees you can get one free credit check every year.

Learn about how to improve and protect your credit score here.

Check your debt-to-income ratio
Another important factor in getting pre-approved is your debt-to-income ratio, or DTI, which compares your monthly expenses to your income. In general, the lower your DTI is, the better, and lenders prefer less than 50%. Read more here about DTI and how you can improve yours.

Research lenders
Doing your homework on rates, reading lender reviews, and asking friends and family members for recommendations will help you decide which lenders you’d like to work with.

After you narrow your choice down to a few, you can interview each one about their lending process, interest rates, closing costs, and other fees they may charge. Get started by reading about the different types of lenders you could work with.

Submit your application
After you’ve chosen the lender you want to work with, it’s time to submit your pre-approval application. In most cases you can upload your documents and fill out all the necessary information online.

Get your pre-approval letter
It won’t take long—lenders often process pre-approvals in less than a day, or at the most three. Now you’ll have a good idea of how much money you can borrow and how much your monthly mortgage payment would be.

Remember that while pre-approval is pretty much essential if you’re serious about buying a home, it’s not a hard commitment from the lender. The monthly payment stated in your letter hinges on interest rates at the time, and those can change day to day. The home you want to buy also needs to pass an appraisal before the lender agrees to move forward.

That said, once you’ve got it, keep your pre-approval letter handy. It will help your lender efficiently process your loan once you have a purchase contract. Plus, you’ll stand out to sellers when you include that letter—and in a competitive market, you’ll want to utilize every possible advantage.

Sources: RocketMortgage