If you've decided that you want to buy a home, the first step you should take isn't necessarily going online and looking at listings, or touring an open house. Before all of that, you need to know an estimate of how much money you could be qualified to take out in a loan from a bank to purchase a home. This is called being "pre-approved for a mortgage," and is truly the first step you should take when purchasing a home.
Many first-time buyers are confused about the mortgage process. Here at Landmark Home Warranty, we always want to make buying and owning a home simple and easy, which is why we offer free listing coverage and comprehensive coverage for our new homeowners, as well as helpful guides like this.
What is a Mortgage Pre-Approval?
When you're pre-approved for a mortgage, it means a credit union or bank has looked at your financials and credit score and written you a pre-approval letter. This letter states how much money they would lend you for a mortgage in buying a home. It does not mean that it is a legal binding contract. There is no guarantee that you will get that pre-approved rate, nor does it mean if you find another company with better rates you can't get a loan with them instead. However, it is a physical document that you can use to help set you apart in the housing search.
Why Should you Get Pre-Approved for a Mortgage?
Many first time homebuyers are confused as to why they would get a pre-approval for a home if there's no guarantee the lender will actually give them a loan. Getting pre-approved for purchasing a home is helpful for a few different reasons:
Helps Potential Buyers Know how Much They can Afford
When you get pre-approved, the bank looks at how much money you make, your credit score and other financial information. They will tell you how much they would be willing to give you for a mortgage. Having this information at hand and in a physical pre-approval letter can help you look at homes that are in that price range. Once you have a pre-approval letter you can show your realtor what you qualify for, and explain what you're looking for, and your realtor can help you find something that works best for you.
Tells the Seller and Listing Agent You're Serious About Buying
As you're looking for a realtor, showing them a pre-approval letter and explaining what you qualify for helps them find something in your price range, but also assures them you're a serious buyer. Including a pre-approval letter in an offer on a home can also set you apart from other candidates who may have put an offer on the same home. A pre-approval letter won't automatically make you the best candidate, but it will show the seller you're capable of purchasing their home and your offer won't fall through.
How to Get Pre-Approved for a Mortgage
- Interview Lenders
Before you get pre-approved for a mortgage, you need to shop around for the lender you feel comfortable with, and who provides you the best rates and term. This isn't an easy process and it takes time, but talking to multiple lenders will ensure you find the best lender for you. Don't just ask questions about their rates and terms either. Talk to them about customer service and have them explain different processes that you may not be familiar with as you talk. You want to choose a lender that makes you feel comfortable and has excellent customer service. Incidentally, if you hire a mortgage broker to work with you during the home buying process, they can help you find the best rates and terms and work between you and the lender to get this process to go smoothly.
As you call lenders, explain your financial situation; how much you make in annual income, your debts each month, how much you'd like to pay per month for a mortgage payment, what kind and type of home you want to purchase, and so on.
- Get Pre-Qualified
After you talk with a few different lenders, they will pre-qualify you for a mortgage. This is not the same thing as a pre-approval. Read more about the differences between being pre-qualified, pre-approved and committed with a mortgage here.
A lender will tell you a rough estimate based on how much you make and your debts on what you can expect to qualify for with a loan.
Once you've been pre-qualified for a few different lenders, compare their rates, terms and customer service. Choose the one that you want to work with as you purchase a home. You can also have more than one pre-approval letter for different lenders. Just remember that what you're pre-approved for isn't always an accurate number of the actual loan. Again, if you have a mortgage broker, they can help you find the best possible loans for you.
- Get Pre-Approved
After you choose the one (or few) lenders you want to get pre-approval from, start the pre-approval process. This process is a bit more intensive and the lender will look at a variety of aspects of your financial situation, including your credit report, to determine a more accurate term, rate and amount you may qualify for, for a mortgage. Once you are pre-approved, the bank will send you a pre-approval letter that you can use to look at homes in the right price range and include in any offers. Once your offer is accepted, to actually have a loan commitment or full approval, you will have to provide more financial information and mortgage underwriters will draft up a legal mortgage for you to sign. Again, this may not be the same as the pre-approval letter, but it also means you can continue to shop around for the perfect mortgage.
What you need to Get Pre-Approved for a Mortgage
There are a number of things that a loan officer will need to create a pre-approval letter.
- Proof of income
A lender will only pre-approve you if they can prove that you have enough money to pay your mortgage every month. This involves ensuring you have a stable job. You can prove this to a loan officer by giving them the last two years of your W2s, tax returns, or your last two pay stubs. The lender may also call your work to verify your employment.
- Proof of assets
Next, a lender has to ensure that you have enough money in the bank for a down payment. These are your "assets" and you can prove that you have money for a down payment by a screenshot of your account.
- Good credit score
The lender will want to know if you will pay your mortgage on time. A credit report will help them determine if the mortgage lender trusts you enough to lend you a significant amount of money. A 580 credit score is the cut off for an FHA loan, while a 720 is the score you need to have the best rates from a traditional loan.
The lender will need a passport or social security card, your driver's license and your signature, stating you allow them to use this information to look up your credit report and create a pre-approval letter for you.
If you're denied, there may be a different number of factors that could be preventing you from getting pre-approved. Here's a flowchart of what may have disqualified you from being pre-approved for a mortgage.
That's all you need to get pre-approved for a mortgage! Of course, the entire process of buying a home is much longer than this short portion, but once you purchase the home, make sure you protect your systems and appliances through a home warranty. You can easily have any breakdowns repaired and replaced for less than $100. Get more information and compare plans and prices here.