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Mortgage Category: Buy A Home

How to Get Pre Approved For a Mortgage

Are you wondering how to get pre approved for a mortgage? It’s one step in the home buying process you shouldn’t overlook.

What Is A Mortgage Preapproval?

Mortgage pre-approval means that a lender has conditionally approved you for a set home loan amount, based on your credit and finances. Having a mortgage pre-approval letter in your pocket can streamline the mortgage application process later since the lender already has your information and has verified your documents.

Although some information can change and the lender may need to re-verify some of your documents, your credit standing cannot change during the commitment period without impacting your loan.

Changes in the financial conditional and application information could jeopardize the approval status of the application. Avoid taking on additional credit obligations during this period.

Additional contingencies may include an approval up to a maximum interest rate since the rate cannot be locked until the ratified purchase contract is received.

A pre-approval can also give you an edge when you’re ready to make an offer on your new home. The pre-approval shows sellers that you’re committed to buying and that you can back up your offer with financing. In a bidding war, a pre-approved buyer may win over a buyer who hasn’t started the application process.

How to get pre approved for a mortgage starts with knowing what to expect.

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How to Get Pre Approved for a Mortgage? Step 1: Check Your Credit

At least three months before you reach out to a lender for a pre-approval, it’s a good idea to review your credit report. This way, you’ll have an idea of what your lender will see and how that might influence your odds of obtaining a pre-approval.

Look for any errors or inaccuracies that could be hurting your credit score. Take steps to dispute the errors, and then follow up one to three months later to verify that they have been corrected. Disputes can take time to resolve.

How To Get Pre Approved for a Mortgage? Step 2: Organize Documents for Your Pre-approval

If you are wondering how to get pre approved for a mortgage you will need certain documents. Get them organized and ready to go for a smooth pre-approval process. The paperwork your lender will need includes:

  • Personal information: You’ll need to provide your Social Security number and date of birth so the lender can order a copy of your credit report.
  • Income information: Your lender will want to see documentation for all sources of income, such as W-2s, pay stubs, recent tax returns, and a profit-and-loss statement if you’re self-employed, as well as additional sources of income, such as Veteran’s Administration (VA) benefits or retirement benefits. If you receive child support or alimony and want to use that income to qualify for your mortgage, you will need to provide the relevant documentation. You do not have to disclose income you receive from a current or former spouse if you don’t want to rely on it to qualify for your loan.
  • Asset information: Your lender will need copies of recent bank and investment account statements, as well as estimated values for any property you own, such as real estate or vehicles.

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When Should I Get a Pre-Approval?

Once you have learned how to get pre-approved for a mortgage and gone through the process you need to think about timing.You can get pre-approved for a mortgage at any time, but generally, it’s better to do it as close to the time you plan to shop for a home as possible. There are two reasons for that.

First, mortgage pre-approvals don’t last forever; typically, they’re good for 60 to 90 days. Apply for a pre-approval too early and you run the risk of it expiring before you’re ready to make an offer on a home. If that happens, you may have to start the pre-approval process all over because lenders are unlikely to renew your loan letters. If you have to get a second mortgage pre-approval after the rate-shopping window closes, your credit score may reflect at least one inquiry.

Second, mortgage pre-approvals result in a hard inquiry into your credit history. That means the inquiry gets factored into your credit score. Each new inquiry for credit has the potential to lower your score by a few points, but the credit agencies allow you some time to shop around for the best home loan. Here’s how it works.

All inquiries are coded to show what kind of lender is checking your credit. The impact from applying for credit will vary from person to person based on their unique credit histories.   Looking for a mortgage may cause multiple lenders to request your credit report. To compensate for this, the Fair Isaac Corporation (FICO) Scores ignore mortgage inquiries made in the 30 days prior to the lender pulling your credit report.

So, if you get a pre-approval done within a 30-day window, the inquiries should not affect your scores while you’re rate shopping – In addition, FICO Scores look at your credit report for mortgage inquiries older than 30 days.

If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14 day span.

For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO Scores.

Home-buying has its challenges, especially if you’re a first-time buyer, but learning how to get pre approved for a mortgage and getting pre-approved shouldn’t be one of them.

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How Credit Plays a Role in Getting a Mortgage

Most people Googling “how to buy a home” soon find out that credit score plays a big role in getting a mortgage.

Your credit score shows lenders how to rate you as a borrower. Lenders want evidence that you pay bills and repay loans. A history of using credit plus a good credit score give a lender reassurance that you’ll repay the large sum of money they’re handing you.

Good Credit Gets You Started

Before house hunting, there are steps you can take to fix your credit, like paying down or paying off debt. You’ll also want to pull your credit reports to look for incorrect information that may be dragging your score down. Cleaning up credit gives you the opportunity to present yourself to a lender as a solid borrower.

Better Credit Can Mean Better Loan Terms

A good credit score helps you qualify for a mortgage with the best loan terms. Here’s why.

Because good credit scores tell mortgage lenders that you’re a safe bet to repay a loan, they may reward you for reducing their risk. A credit score above 720 is considered excellent and gets you the best home loan rates, according to the online financial site NerdWallet. NerdWallet says that the lending industry, in general, adjusts the interest rates that they offer based on credit score. On a conventional mortgage, the higher your credit score the lower the interest rate will be. The lower your credit score, the higher your interest rate, which could cost you a lot of money over the life of the loan.

Borrower-required credit scores vary with the type of mortgage. A government-insured FHA loan, for example, has lower credit score and down payment requirements than conventional loans. VA loans also offer terms that may have lower credit score benchmarks since many members of the military won’t need or get credit until they leave the service. If you’re a first-time homebuyer looking for a mortgage program that will make home ownership possible, it pays (literally) to shop around.

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One Road to Better Credit

If you’re seriously thinking of home ownership, but need to improve your financial profile first, a good way to build credit is with a secured credit card. Secured cards like the OpenSky® Secured Visa® Credit Card are powerful credit-building tools. You make a security deposit to the card company equal to the amount of your line of credit. Then you can charge purchases to the card like any regular credit card.

Credit cards like the OpenSky card report to the major credit bureaus each month. The work you put into building good credit – using the card for purchases regularly, paying down or paying off your balance each month, on time – can pay off with a greatly improved credit score, even as quickly as six months.

Prepping Your Finances First Is Worth It!

Higher interest rates of even a fraction of a percent can cost you a lot more in home loan payments over the long term. Preparing your finances for homeownership by improving your credit score is a worthy goal to go after!

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What is a jumbo loan?

A Jumbo loan is a loan for more than the conforming loan limit set by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA). The conforming loan limit can change annually, which affects the amount of a Jumbo loan. Talk to a loan originator for exact details in your area.

What’s an Adjustable Rate Mortgage (ARM)?

An ARM is a loan with an interest rate that changes at the scheduled adjustment date based on movements in an index rate, such as the rate for Treasury securities. ARMs usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates increase, generally your loan payments increase; and when interest rates decrease, your monthly payments may decrease. Depending on the type of ARM loan, the interest rate and monthly payment will change every month, quarter, year, three years, five, seven or ten years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of one year is called a one-year ARM, because the interest rate and payment change once every year; a loan with a three-year adjustment period is called a three-year ARM.

Some ARMs have interest-rate caps and the cap may hold your rate and payment below what it would have been if the change in the index rate had been fully applied. Since the increase in the interest that was not imposed due to the rate cap the amount it could adjust to will carry over, at the next future rate adjustment, your payment might increase, even is the index rate has stayed the same or declined.

What’s a fixed-rate mortgage?

This is often considered for homebuyers who intend on staying in their home for several years, a fixed-rate loan has a predictable monthly payment for the life of the loan.  The duration of the loan impacts the dollar amount of the monthly payment, amount of interest paid, amount of time to build equity in a home, and length of time to pay off the loan.

Longer term loans have lower monthly payments and pay more interest over the life of the loan, taking longer to build equity and pay off the mortgage.

Shorter term loans have higher monthly payments and pay less interest over the life of the loan, taking less time to build equity and pay off the mortgage.

In general, the longer your loan term, the more interest you will pay. Loans with shorter terms usually have lower interest costs but higher monthly payments than loans with longer terms.

 

Can I use my own title company?

Yes, you may use your own title company or use one from our preferred provider list. The lender, nor anyone else, can require you to purchase the insurance from a particular title company for either the lender’s coverage title insurance or the optional owner’s coverage title insurance. The title insurance and coverage must meet the lender requirements, though for the lender’s coverage.

Will I be required to purchase title insurance?

Yes. Your lender will want to be sure the property has a clear title and will require a Lender’s Coverage Title Insurance policy. It is optional to purchase an Owner’s Coverage Title Insurance policy to protect yourself from threats to your title and ownership that may have gone undiscovered at the time of closing.

What is the difference between APR and interest rate?

The interest rate is the cost you will pay to borrow the money for a mortgage.  It does not include fees or other charges you may pay to obtain the mortgage.

The Annual Percentage Rate (APR) is the total cost of the loan, other charges or fees and is calculated by spreading the upfront costs over the life of the loan and expressing this as a percentage of the loan amount that you pay each year.

The APR reflects not only the interest rate but also any points, mortgage origination fees, and other charges that you pay to get the loan.

What’s the difference between pre-qualified and pre-approved?

A pre-qualification is a letter provided to a buyer from a loan officer. It is intended to provide an indication of the mortgage the buyer might qualify for.

A pre-approval letter from a lender, however, is a letter that indicates a conditional commitment to lend. There are always conditions for things not done yet like an appraisal or title work, and possibly conditions related to things a buyer still needs to provide. But it allows the loan originator to firmly state that the buyer qualifies for a specific mortgage amount, provided all conditions are eventually met and, based on an underwriter’s review of their financial information, including their credit report, pay stubs, bank statement, salary, assets and obligations which is documentation provided by the buyer.