As you look for a potential home, getting pre-approved for a mortgage is possibly an important step for you to take. Speaking with a lender and securing a pre-approval letter gives you the opportunity to discuss loan and budgeting options with the lender; this step can ultimately help to clarify your total home-hunting budget and the mortgage payment you can actually afford.
What’s a Mortgage Pre-Approval?
The pre-approval process is the first phase of qualifying for a home mortgage. Basically, when you’re pre-approved, a lender has said that they will allow you to borrow up to a specific amount of money. To get pre-approved, you’ll need to provide your lender with the necessary information, including your credit score, your income, your employment history, your credit report, and so forth. After the lender assesses your information, they will determine whether or not you are eligible for a mortgage.
Pre-Approval Is an Assessment of Your Financial Situation
Before lenders choose to pre-approve you for a mortgage, they will check out a handful of key factors, including:
- Your credit history
- Debt-to-income ratio
- Credit score
- Employment history
- Assets and liabilities
Consider a mortgage pre-approval as an assessment of your finances. Lenders will more than likely look into all corners of your financial life as a method of making sure that you’ll repay your mortgage.
A pre-approval includes the process of filling out a mortgage application and furnishing your Social Security number so that the lender can process a hard credit check. A hard credit check is triggered when you apply for a mortgage. In this process, a lender obtains a copy of your credit report and credit score to check your creditworthiness before making the decision to lend you money. These checks are then recorded on your credit report and may impact your overall credit score.
Why Get Pre-Approved?
A pre-approval on a mortgage illustrates how much money a lender will allow you to borrow. Therefore, by being pre-approved, you’ll know how much you can afford to spend on a house, which will make the entire process of searching a lot easier. Plus, when you do find that dream home, you’ll be one step closer to securing the financing you need to call it your own.
When You Should Get a Pre-Approval
Mortgage pre-approval letters are usually valid for anywhere around 60 to 90 days. Lenders put an expiration date on these letters due to the fact that your finances and credit history/score could change. When a pre-approval expires, you’ll be required to fill out a new mortgage application and submit updated paperwork to get another one.
If you’re just beginning to think about going through the home-buying process, and suspect you might face some obstacles in obtaining a mortgage, going through the pre-approval process will likely help you identify credit issues—and potentially even give you the time to fix them.
Seeking pre-approval 6 months to a year in advance of home hunting places you in a stronger position to boost your overall credit profile. You’ll also have more time to save the required finances for a down payment and closing costs.
When you are ready to make offers, a seller typically wants to see an official mortgage pre-approval and, in some cases, proof of financial stability to show that you’re a serious buyer. In many hot housing markets, sellers have an advantage because of intense buyer demand and a limited number of homes for sale; they may be less likely to consider offers without pre-approval letters.