Getting a mortgage preapproval can give you a big advantage in the home-buying process. Here are three reasons to get a mortgage preapproval before house hunting:
- Get a better idea of what you can afford
No one has time to waste on searching for and looking for homes they can’t afford. A preapproval can help determine how much you can afford and what a lender would be willing to lend you. Lenders generally want no more than 28 percent of your gross monthly income (before taxes, that is) to go to housing expenses, including mortgage payment, property taxes and insurance.
- Stay competitive with other potential buyers
Serious buyer should pursue a preapproval from a lender in advance to beginning a home search. You’ll be at a huge disadvantage if you find your ideal home and lose out to other buyers who do have that preapproval letter in hand.
- Have your offers welcomed by agents
Some agents counsel their clients to set aside offers on homes from buyers who don’t have a preapproval letters from their banks. Sellers don’t want to take their home off the market only to find out the buyer can’t get pre-approved for a mortgage loan down the road.
What is preapproval versus prequalification?
Prequalification and preapproval are different and easy to confuse with each other. A mortgage lender might tell you how much you prequalify for; while a good start, prequalification isn’t concrete enough to agents or home sellers these days.
A preapproval, on the other hand, relies on documentation and shows lenders what you qualify for based on your financial history and income. A preapproval uses your paper trail to determine how much home you can afford. It means you complete a mortgage application and have a hard credit check done to determine your creditworthiness. Preapprovals are typically valid from 60 to 90 days because your credit report could change in that time.
Preparing to get preapproved for a mortgage
Before you do anything, get all the information organized that the lender will need. Some of the documents to produce for the lender include:
- Current pay stubs
- W-2s from the last two years
- Last two federal income tax returns
- Bank statements (from all accounts in your name)
- Credit report
- Driver’s license or passport
If you are self-employed, it might get a little more complicated. You will need to show some other information that backs the fact you have consistent income to pay a mortgage. The other documents might be business bank statements, a business license, and company tax returns.
Before even talking with a lender, you should first get a copy of your credit report. You need to know if any red flags will pop up when the lender is checking.
Credit reporting agencies (Experian, Equifax, and TransUnion) by law must give you a free copy of your credit report once every 12 months. You can get all three reports at www.annualcreditreport.com. Look this over carefully for any mistakes. Lenders use that report not only to determine whether they will give your mortgage preapproval but also what interest rate you will receive.
Look for local lenders on my webpage that can help you get pre-approved for a mortgage loan.
Reference:Nelson, L. (March 9, 2019). What to Know About Mortgage Preapproval. BankRate. Retrieved from: https://www.bankrate.com/mortgage/pre-approval/