Mortgage pre-approval: The first step in financing a new home

A Mortgage Pre-approval is the first step towards buying a home. It is an evaluation by lender for your eligibility for a mortgage and how much money you can borrow and at what interest rate. They accomplish this by performing a credit check, verifying your income and debts to ascertain a full financial picture.

Do I need to go to a bank to get a Mortgage Pre-approval?

Whether you use a conventional bank or some other kind of financial institution, you will need to fill out the same kind of forms and provide similar information. You don’t physically need to present yourself at a bank as everything can be done online or over the phone once you choose lender.

What documents and forms will I need to submit and fill out?

You will need to agree to/submit the following:

A credit check

Most recent pay stubs

Last two months of bank statements

Copies of your recent W2 Forms

Tax returns

Details of your down payment — the amount and source

How long does it take to get a pre-approval letter?

If all the information you have supplied meets the bank’s criteria, they may be able to get you a letter within 2-3 days or less. However, if your credit is borderline or your income and downpayment are not quite enough to match with their loan programs, they may require more information, ask you to pay down some debt or have a larger downpayment which will delay the process.

Don’t get a Pre-approval letter confused with a Pre-qualification letter

A Pre-Qualification letter is far less detailed and thorough than a Pre-approval letter. It really doesn’t carry much weight in the home buying process. It basically states that the lender believes you are sufficiently qualified to start the pre-approval process. These generally are not really worth bothering with if you are serious about buying a home.

How can a Mortgage Pre-approval letter help me buy a home?

The first and most obvious way it can help is letting you know how much home you can afford. There’s no point in looking at million dollar properties if the most you can qualify for is $500,000.

Secondly, many real estate agents will ask if you have a mortgage pre-approval letter before agreeing to work with you. This helps in two ways. The realtor knows that if they find you a home within your price range, you will be able to get a loan for it and the property will close. This obviously benefits the realtor because they know they will get paid and also they know that sellers will take your interest seriously.

Lastly, as you have already submitted your financial information to the bank, once you do find a property, there is a good chance that you will be able to close quickly because you already have all your ducks in a row. It could streamline the underwriting process and shave days or even weeks off the time to close.

However, a pre-approval letter is only good for a certain period of time— usually 45-60 days — as interest rates fluctuate and your bank statements and pay-stubs will need to be updated.

How to improve your chances of a Mortgage Pre-approval

These are the steps you can take to make the pre-approval process a breeze:

Improve your credit — Pay your bills on time, keep credit card balances below 30 percent

Make sure your Debt to Income ratio (DTI) falls within qualification guidelines — This is all your monthly debt payments divided by your gross monthly income (before taxes and other deductions are taken out). Lenders usually look for a 43 percent DTI in order to qualify for a mortgage.

Make sure you have the down payment — simply having the money in your account is not enough. It has to be seasoned, which means it has to have been in your account for 2 months or more. A family member can also give you the down payment but this has to be in the form of a gift not a loan.

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