If you’re thinking about buying a house but not sure how much you can spend, getting preapproved for a mortgage will help you set a budget and make an offer on a home with confidence.
Learn about the preapproval process, the paperwork you need to get started and be prepared to provide additional documentation throughout the process. Our tips will guide you in the right direction.
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What Does it Mean to be Preapproved for a Mortgage?
When you have been preapproved for a mortgage it means a lender is willing to loan you a certain amount of money to buy a house. The amount of money you can borrow is based on the lender’s assessment of your current financial situation, your down payment, and the terms of the loan. A mortgage preapproval is typically valid for 60 - 90 days.
When you know the amount of money you can borrow, you can set a price range, and determine how much you can comfortably spend on a home. When it’s time to present an offer to the seller, they will see that you’re qualified for a mortgage amount that will fund the purchase of the house.
It’s important to note that you can be preapproved based on information you state on your request such as income (self-employed borrowers must prove their income up front) and assets, but to obtain a final mortgage approval you will need to verify the information you provided with your preapproval request. The safest way to proceed is to provide all income and asset verification information when getting preapproved. This way, there will be no surprises regarding the final approval amount due to inaccuracies in that information.
Key Documents for the Mortgage Preapproval Process
Two months of financial statements (bank, investment, and retirement accounts). Financial statements provide an overview of your current financial situation and spending patterns. The bank statements will be reviewed to confirm you have funds available to cover closing costs, the down payment, and a minimum of 2 months of mortgage payments. Balances and transactions will be reviewed for consistency. Large deposits, withdrawals and other transactions may require additional explanation and documentation before preapproval is granted. Investment and retirement accounts provide a holistic view of your asset profile.
Proof of employment and income.
Income includes, salary, alimony, and any other forms of documented income. To verify income, lenders typically require your two most recent pay stubs and two years of W2 tax forms. If you are self-employed or own your own business, you will be asked to provide two years of personal and business tax returns, including all schedules and supporting documents.
Good credit goes a long way. Mortgage lenders often use a ‘triple merge credit report,’ this includes your credit report information (along with a credit score) from each of the major reporting agencies, Trans Union, Equifax, and Experian. Your credit report will be used to assess your willingness to repay debts. In addition to your credit score, it includes outstanding debts and information on your repayment history.
A Lender will typically use the ‘middle score’ from the three bureaus to assess your credit worthiness, the higher the better. Lenders prefer credit scores above 700 but will generally lend to borrowers with scores as low as 620, depending on other circumstances and terms associated with the loan. Generally speaking, the higher the credit score the better your chances of getting approved.
It’s recommended that you know your own credit strength before reaching out to lenders to start the mortgage preapproval process. Obtain copies of your credit report(s) from the three agencies, review it closely and dispute delinquencies and discrepancies that are inaccurate with the individual creditor. If corrections are needed, wait 60 days until your credit score refreshes before you start the preapproval process.
The Mortgage Preapproval Letter
When you’re preapproved for a mortgage, you’ll receive a letter from the lender disclosing the amount of money you’ve been preapproved to borrow for the purchase of a home. Now, the search begins.