How to Get Preapproved for a Mortgage
Point of Interest: Mortgage Preapproval
Getting preapproved for a mortgage is a little more involved than getting prequalified. You’ll have to fill out a mortgage application, provide your lender with extensive documentation and undergo a full financial review. However, you will likely be taken more seriously by sellers and the odds of your offer being accepted will increase.
A mortgage preapproval letter should be the first step in the home buying journey. The process involves a lender analyzing your financial situation and credit to determine how much money you’re qualified to borrow. This process can help you set a realistic budget for your home search and can also put you in a better position to negotiate with sellers in a competitive housing market. Though getting preapproved takes extra some time up front, it can be beneficial and can save you time on the back end.
What is a mortgage preapproval?
A mortgage preapproval is a letter from your lender stating how much money you can borrow. It also gives you information about the interest rate you qualify for. A mortgage preapproval is one step above a prequalification. To get prequalified for a certain loan amount, you only need to provide an overview of your financial history.
During the preapproval process, your lender will ask you to provide supporting documents that prove your income and assets. They’ll also conduct an extensive review of your finances and check your credit. This is so they can give you a more accurate estimate of what you can borrow.
Prequalification is usually easier and faster than preapproval because it doesn’t involve a financial review. Still, getting a mortgage preapproval is worth the extra time in most cases as it carries more weight than a prequalification. It’s the closest you can get to final loan approval and sends a strong message to sellers that you’re a serious, qualified buyer.
How to get preapproved for a mortgage
Before you start the preapproval process, you should make sure that your finances are in order to increase your chances of success. You may also want to:
Find out your credit score.
If you don’t already know your credit scores, you should find out what they are. You’ll need a credit score of at least 620 to get approved for most mortgages. You can check your scores and reports for free once per year on annualcreditreport.com.
Check your credit report and dispute errors.
You should also take a look at your credit reports to make sure there aren’t any errors on them that are hurting your scores. You can request a free report once per year from each of the three major credit bureaus — Experian, Equifax and TransUnion.
Check all three reports to make sure you recognize all of the accounts listed. Also, make sure that bad debts from more than seven years ago have been removed. All of your personal information should be correct, too, like your name and address. If your name is wrong, someone else’s debts could start showing up on your report.
If you notice any of these common errors, contact the company that provided the inaccurate information, like your bank or credit card company. You may be able to resolve the issue with them. If not, you can file a dispute through the credit bureau. Include copies of any statements that support your claim. Once they receive your dispute, they’ll investigate the error and decide whether or not to remove it.
Calculate your debt-to-income ratio.
Before you try to get preapproved, you should calculate your debt-to-income ratio (DTI) — the percentage of your gross monthly income that goes toward debt payments like student loans and credit card bills. You’ll need to have a ratio of around 45% to 50% or less to be considered for many mortgages.
Find out how much house you can afford.
Decide if you’re ready to apply.
If you don’t have a good credit score or a low debt-to-income ratio, you may want to improve your financial situation before you apply for a mortgage preapproval. If your financials look pretty good, you’re ready to start your application.
Gather up your financial documents and complete the application.
To get preapproved, you’ll need to find the lender(s) who may be the right choice for your situation. You’ll then have to fill out a pretty detailed mortgage application and provide your supporting financial documents. Gather up the documents you’ll need before you start the paperwork, including your social security number, pay stubs, bank account statements, employment details and investment account information.
You should also give yourself plenty of time to fill out the application. It has several sections that cover your assets and liabilities, your monthly income and other aspects of your financial history. Set aside at least a few hours to fill it out so you can take your time and avoid errors.
How long will it take to get preapproved?
Thanks to automated underwriting, the preapproval process is faster than ever. If you send in all of your financial documents and paperwork up front you could have your preapproval letter in as little as three days.
If your lender has to ask you for more documentation and wait for you to send it in, your preapproval may take a few weeks. Try to send in all the information your lender needs the first time to help the process go as smoothly as possible.
Why should I get preapproved for a mortgage?
Getting preapproved for a mortgage is often considered the first step of the home buying process — and for good reason. Some people who want to buy a home aren’t financially ready yet. If your finances need a little work before you can get a mortgage, it’s better to find that out sooner rather than later.
Securing a preapproval letter also helps you figure out how much house you can afford. You’ll know exactly how much money your lender will allow you to borrow so you can set a realistic budget before you go house hunting.
Having a preapproval letter to show sellers will also strengthen your offer and increase your chances of landing your dream home. Sellers are always worried that buyer financing will fall through at the last minute, but since you’ve been offered a loan up to a certain amount by your lender, sellers know that you can afford their home and close the deal.
Improve your chances of getting a mortgage preapproval
Unfortunately, some people get denied when they apply for a mortgage preapproval. If that happens to you, don’t panic — there are plenty of things you can do to improve your financial situation and boost your chances of success next time around.
Reduce your debt-to-income ratio.
Lenders look at your debt-to-income ratio to verify your ability to handle monthly mortgage payments. If you have a high debt-to-income ratio, you’re more likely to default on your home loan. Lowering that ratio is one of the best things you can do to boost your chances of getting preapproved.
There are two ways you can reduce your debt-to-income ratio — raise your income and lower your debt load. Increasing your income can be tough, but picking up a side hustle or getting a small raise can help move the needle. Paying down existing debt and avoiding new debt can also decrease your debt-to-income ratio and make you a better candidate for a mortgage.
Improve your credit score.
If you have a good credit score, you’re much more likely to qualify for a mortgage with a low interest rate. If your score is average, there are plenty of things you can do to boost it.
Look over your credit report and make sure that errors aren’t dragging down your score. Create a plan to start paying down your debt. Make a budget and identify ways to cut back so you can put more money toward your debt.
You should also set up automatic payment reminders so that you never miss a payment. Late or missed payments can damage your credit score and bring it down even further.
Finally, try not to rack up more debt. If possible, stop using your credit cards or keep the balances low and pay them off in full at the end of each month.
Getting preapproved for a mortgage if you’re self-employed
Getting preapproved for a mortgage is more difficult when you’re self-employed. You’ll have to provide more documentation than an employed applicant, including profit and loss statements, 1040 tax returns and schedules.
Your net income, which is your income after deductions, will also need to be high enough to meet your lender’s debt-to-income ratio requirements. Lenders typically look for a ratio of 50% or lower, which may be hard to achieve if you write off lots of business expenses.
Even if you have the right documentation and a decent debt-to-income ratio, your application will be scrutinized more heavily than borrowers who aren’t self-employed. Lenders usually view self-employed applicants as a risk so they offer them less favorable interest rates and reject them at higher rates.
Still, there are things you can do to bolster your application and improve your chances of being preapproved.
If you improve your debt-to-income ratio by reducing your tax deductions and paying down debt, you’ll have an easier time getting preapproved.
Keeping good financial records and separating your personal and business accounts may also help.
If all else fails, consider working with a local credit union. They often consider borrowers with nontraditional financial situations. You might also consider increasing your down payment to help show lenders that you’re not a risk.