How to Get a Mortgage Pre-approval for a Home
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A mortgage pre-approval is a good way to determine if you are eligible for a loan. If you want financing to buy a home, like most people, then you first need to get a mortgage pre-approval. To many people, buying a home is scary as it’s the biggest asset they will ever own. Therefore, getting a mortgage pre-approval helps to minimize stress around the home buying process.
Knowing how much you can afford through a mortgage pre-approval helps you to streamline the house-finding process so you don’t run the risk of falling in love with a home outside of your budget. Just work with a reputable realtor to see homes that you can afford and narrow down your choices. Once you lock in a dream home, head back to the bank or broker to finalize the mortgage application process.
Today, there are many types of mortgages available. Keep reading to learn more about them as well as the 6 steps to get a mortgage pre-approval secured before you start looking for a home.
1. What is a Mortgage?
Put simply, a mortgage is a legal agreement between you and the bank. The bank agrees to lend you a certain amount of money at specific terms. The mortgage is a legally binding agreement and is public record. You sign it when you borrow money to buy a home. The document states that if you don’t pay your debt as agreed, the bank can repossess the home.
2. How Can You Get a Mortgage?
Banks, mortgage lenders, and mortgage brokers offer mortgages. You must meet the bank or lender’s guidelines to get approval. Each mortgage program and lender has its own guidelines.
Whether you apply for a mortgage at a bank, lender, or mortgage broker, you fill out a standard loan application to get a mortgage pre-approval finalized. It asks questions about all of the following:
- Personal information – Name, address, social security number, birthdate
- Employment information – The name and address of your current and previous employers
- Income information – The amount of income you make weekly, monthly, or annually
- Debt information – The amount of debts you currently hold
- Credit information – Disclosure of any negative credit information, such as collections or judgments
- Asset information – The amount of money you have in liquid assets, such as checking, savings, stocks, bonds, or other liquid investments
- Property information – Information on any properties you currently own and the amount you owe on any mortgages
3. Mortgage Approval Calculator?
You’ll find many mortgage approval calculator programs online. These calculators can help you estimate how much you can afford. Don’t take the results at face value, though. The program uses automated algorithms based on the information you provide.
For example, you’ll provide the following information:
- Annual income
- Mortgage term
- Interest rate
- Credit score range
- Down payment amount
- Estimated property taxes
- Estimated homeowners insurance
- Current debts
The mortgage approval calculator provides an estimated approval amount. You can use this as a baseline when choosing your mortgage amount. However, a lender will have the final say on how large of a loan you can receive.
4. Difference Between a Pre-Qualification and Pre-approval
Many people use the terms pre-qualification and pre-approval interchangeably, but you shouldn’t. A pre-qualification is more basic than a pre-approval: it’s the first step you should take when you decide you want to buy a home.
Many borrowers use pre-qualification as the first step. They learn how much a lender might give them. From there, they get their documents together, work on their credit, and then apply for pre-approval to get the money they need to buy a home.
Lenders ask the same information of you for a pre-qualification, but they don’t ask for documentation. Lenders use the information you provide to give you an estimate of what you can afford. The lender may write a pre-qualification letter, but again, it’s an estimate. It will include potential interest rates and payments, but nothing is concrete until you provide proof of your qualifications.
If you provide inaccurate information, your pre-qualification estimate may be slightly different from what you get. For example, if you estimate your credit score too high, a lender may quote a lower interest rate than you qualify for based on your actual score.
5. Six Steps to Getting a Mortgage
Step I. How to Get a Mortgage Pre-approval?
Before you shop for a home, get a mortgage pre-approval. Some banks will even let you fill this application out online. After you complete the mortgage application, lenders decide if you qualify. The pre-approval doesn’t include any property information, which is why it’s a pre-approval.
The lender states that you qualify for a specific loan amount at a specific rate and term. The pre-approval remains subject to the property’s approval. This includes a clean title search and a high enough appraised value.
Get a mortgage pre-approval process process completed before asking your realtor to start looking for houses. It will speed up the purchasing process. In addition, most sellers prefer buyers who have secured a mortgage pre-approval than a competing buyer who hasn’t. In most instances, sellers are desperate to close the deal as soon as possible because they don’t want to carry two mortgages.
Realtors also give priority to clients who have done a mortgage pre-approval because it costs them money to drive around for showings and they know that clients who have pre-approval are serious about buying a home.
So potential buyers can use a pre-approval letter to get their foot in the door when shopping for a home.
Use the following steps to get your preapproval:
Before you shop for a home, get a mortgage pre-approval (some banks you can fill up a mortgage pre-approval online). After you complete the mortgage application, lenders decide if you qualify. The pre-approval doesn’t include any property information, which is why it’s a preapproval.
The lender states that you qualify for a specific loan amount at a specific rate and term. The pre-approval remains subject to the property’s approval. This includes a clean title search and a high enough appraised value.
Get a mortgage pre-approval process completed before asking your realtor to start looking for houses. It will speed up the purchasing process. In addition, most sellers prefer buyers who have secured a mortgage pre-approval than a competing buyer who hasn’t. In most instances, sellers are desperate to close the deal as soon as possible because they don’t want to carry two mortgages.
Realtors also give priority to clients who have done a mortgage preapproval than those who haven’t because it cost them money to drive around for showings.
Buyers use the pre-approval letter to get their foot in the door when shopping for a home.
Related post: How to Pay Off Your Mortgage Quickly in 10 Super Easy Ways
Use the following steps to get your preapproval:
- Proof of identity – Before a lender pulls your credit, they must verify your identity. Your driver’s license can satisfy this requirement.
- Proof of income – Your paystubs provide proof of your YTD income. You’ll also need your W-2s or tax returns for the last two years. If you work on commission or are self-employed, lenders will require your tax returns.
- Proof of employment – Lenders need your employer’s contact information. They will call your employer to ensure that you still work there.
- Proof of assets – You need enough money for the required down payment and closing costs. Lenders need the last two months of bank statements. If you made any large deposits during that time, be ready to prove where the funds originated.
After you complete themortgage application and lenders review your documents, if you qualify, they will provide you with a pre-approval. The pre-approval letter will show:
- The maximum loan amount
- The term (15, 20, or 30 years)
- The estimated interest rate (it’s not official until you lock in a rate
- The estimated monthly payment
- An expiration date for the pre-approval letter
Once you have the mortgage pre-approval letter, you can shop for a home with ease.
Related reference: How to figure out how much you can afford.
Step II. Find a House
You typically have 60 to 90 days to find a home. Time is of the essence, but don’t worry if you run out of time. If you don’t find a home before your pre-approval expires, you can extend it. You’ll need to update your information with the lender to do so, but it only takes a few minutes. Lenders need proof that nothing has changed with your financial situation. An updated paystub, updated asset statements, and a credit pull are all lenders typically need to do to extend your pre-approval.
With the extended pre-approval offer, you can continue your home search until you find the perfect property.
Step III. Make an Offer
Once you find ‘the house,’ you can make an offer. Your pre-approval letter is very important at this point. Sellers hesitate to accept offers from anyone not yet pre-approved. How do they know that you qualify for a loan? Your pre-approval letter lets sellers know that a lender will give you a loan at a specific amount and that you qualify for it.
Make an offer that makes sense with your approved loan amount and saved down payment. If the seller accepts the offer, you sign a purchase contract and move forward with your mortgage processing. Some sellers may negotiate on certain terms. Using a realtor and/or real estate attorney helps get you through this process easier, ensuring that all parties are properly represented.
Step IV. How to Apply for a Mortgage
Once you sign a purchase contract, it’s time to choose the appropriate lender. You aren’t obligated to use the lender that provided you with the pre-approval – you can still shop around. We suggest that you get at least three pre-approvals so that you know where you stand. You can then choose the lender that offers the best deal and that you are comfortable with.
Many people avoid getting multiple quotes from lenders because they worry about their credit score falling. You don’t need to worry about your credit score at this point. If you get quotes from several lenders within a short time, the credit bureaus only count it as one inquiry. At the most, you’ll lose five points on your credit score, which is negligible, compared to the value of shopping around to find the best deal. Try to get all quotes within a 2-3 week span to ensure that you don’t damage your credit score.
Once you choose a lender, apply for the mortgage, and move forward with the processing.
Step V. Mortgage Application Processing
The lender needs a copy of the purchase contract to continue the process. If your mortgage pre-approval didn’t expire yet, the lender can move through the process quicker. The lender will order a title search and appraisal on the property first. The title search must come back free of any liens. The appraised value must also be at least as much as the purchase price.
Once the property checks out, the lender will finalize the approval process with a few quick steps:
Re-verification of your employment – The lender verifies that you are still at the same employer, same position, and have the same income.
Re-verification of your credit – Lenders often pull your credit one more time, typically right before the closing. This ensures that you didn’t take out any new loans or overextend your revolving credit since the pre-approval.
Clear any other outstanding conditions – If the pre-approval letter had any other conditions, the lender needs them satisfied before closing on the loan.
Step VI. Sign Your Loan Documents at Closing
After the underwriter clears your loan to close, it’s time to head to the closing. This is when everything becomes official. Until this point, you had a pre-approval – not an actual approval. Once the lender approved your credit, income, and asset documentation, the lender approved you for the loan. They didn’t approve of the property yet.
Once the property passes the lender’s approval, though, you are clear to close. In other words, the lender says you can sign the mortgage documents, take possession of the home, and funds can exchange hands. After the closing, you become the proud owner of a new home and a mortgage.
5. How Does a Mortgage Work?
As much as a mortgage is a document you sign, it’s also a loan. You receive funds from a bank or mortgage lender. You pay the seller of the home with the funds. In exchange for the mortgage, you sign a promissory note. The note states that you will repay the amount you borrowed (principal) at the agreed-upon interest rate.
A mortgage is a secured loan. In other words, the bank has the right to seize your property if you don’t make your payments.
6. What are the Elements of a Mortgage?
Mortgage payments have five elements:
You pay 1/12th of the taxes, homeowner’s insurance, and mortgage insurance each month if you set up an escrow account with your lender. You pay all of these amounts in one payment to your lender. The lender handles the disbursem*nt of the funds. They put the real estate taxes, homeowners insurance, and mortgage insurance payments in an escrow account. Near the due date of the bills, the lender uses those funds to pay your bill for you.
7. Types of Mortgages
As you shop for a mortgage, you’ll come across several types of mortgages. Each type has different guidelines and capabilities:
- Conventional loans – These loans aren’t insured by the federal government. Private lenders write/fund the loans and Fannie Mae/Freddie Mac buy them on the secondary market. You need good credit, low debt-to-income ratios, and stable income to qualify. They are available in conforming loan amounts up to $484,350 or non-conforming (jumbo) loan amounts over $484,350.
- Government loans – Private lenders write and fund government loans, but the government agencies insure them. Borrowers with a 580 credit score, decent income, and a 3.5% down payment may qualify for an FHA loan. Other government loans include VA and USDA loans. VA loans are for veterans or active members of the military and USDA loans are for rural properties and low to moderate-income families.
- Subprime loans – Alternative lenders write subprime loans or loans they keep on their own books. These lenders have more flexibility in guidelines because they set the rules themselves. Borrowers that don’t fit the conventional or government guidelines often turn to these alternative lenders.
8. What is a Fixed Rate Mortgage?
A fixed-rate mortgage has one interest rate for the life of the loan. Your mortgage’s principal and interest payment never change. Your real estate taxes and insurance payments may change though, as taxes and premiums often change.
Fixed-rate mortgages offer predictability. You don’t have to guess your payment amount every month. However, fixed-rate mortgages have higher interest rates than adjustable-rate loans.
9. What is a Variable Rate Mortgage?
Variable-rate or adjustable-rate loans have ever-changing interest rates. Initially, you get a fixed interest rate. This is the introductory period. For example, you may see a quote for a 3/1 ARM. This means that the interest rate is fixed for the first three years. The rate adjusts annually after that period.
You can typically get a lower interest rate initially on a variable rate mortgage than a fixed loan. The tradeoff, though, is the adjustable rate you must endure annually after the introductory period. The rate changes based on the chosen index (such as LIBOR), the margin set by the lender, and the caps put in place.
For example, a lender may charge you a margin of 1%. Your new rate would be LIBOR plus the 1% on your rate adjustment date. Each ARM loan has caps, too. Lenders set annual interest rate caps, lifetime caps, and even initial adjustment caps. This helps keep your interest rate affordable, but still adjustable.
10. How Much Down Payment Do I Need to Get a Mortgage?
Each loan program has a different down payment requirement:
- Conventional loans – You need a minimum 5% down payment. If you put less than 20% down on the home, you must pay Private Mortgage Insurance. You pay PMI until you owe less than 80% of the home’s value. Lenders cancel the PMI upon request once you owe less than 80% of the home’s value. By law, they must automatically cancel the PMI once you owe 78% of the home’s value.
- FHA loans – You need a minimum 3.5% down payment if you have a 580 credit score. If you have a credit score between 500-579, you need a down payment of 10%. The FHA charges mortgage insurance for the life of the loan. You can’t cancel it at any time. If you want to eliminate it, you must refinance into a different program.
- VA loans – You don’t need a down payment for a VA loan. Only veterans that served at least 90 days during wartime, 181 days during peacetime, or 6 years in the National Guard or Reserves are eligible. You must also have an honorable discharge and use the funds for a primary residence.
- USDA loans – You don’t need a down payment for a USDA loan. Only borrowers with low to moderate household income qualify. You must also buy a home in a rural area as designated by the USDA.
11. What is a Mortgage Broker and When Should You Use One?
A mortgage broker is a middleman between the bank and the borrower. Mortgage brokers have relationships with hundreds of lenders. The right mortgage broker offers options for your loan, especially if you don’t meet the ‘traditional’ borrower mold.
If you don’t qualify for a mortgage from your local bank, using a mortgage broker helps reduce the amount of work you must do. The mortgage broker provides options from many lenders, often fitting you with the lenders they know work the best with your financial situation.
12. Do You Need Good Credit to Qualify for a Mortgage?
It’s always a good idea to have good credit to qualify for a mortgage, but it’s not a requirement. If you have less than perfect credit, you may still get mortgage financing as there are many types of mortgages available. In general, the major loan programs require the following:
- Conventional loans – Minimum 680 credit score
- FHA loans – Minimum 580 credit score with a 3.5% down payment
- FHA loans – Minimum 500 credit score with a 10% down payment
- VA loans – The VA doesn’t have a minimum credit score, but most lenders like a minimum 620 credit score
- USDA loans – Minimum 640 credit score
Lenders base your loan approval on your credit score as well as your other qualifying factors. If you have ‘bad’ credit, you may be able to offset it with other good qualifying factors, such as:
Low debt-to-income ratio – Lenders compare your total monthly debts to your gross monthly income. The less income you pay out each month, the lower your debt-to-income ratio. Lenders like borrowers that have low DTIs as it lowers the mortgages’ risk of default.
Stable employment – If you are at the same job for many years, it shows lenders that you are consistent and reliable. Lenders like both of these factors because it lowers the mortgage’s risk of default.
Assets – If you have money left in your bank account after paying the down payment and closing costs, it can help. Lenders call these assets reserves. They determine how many months of mortgage payments you can cover with the assets. Typically, two months of reserves can reduce the risk of default on your mortgage.
Related post: How to Save Money for a House in 17 Sure-fire Ways
13. What is a Good Credit Score?
According to Experian, a good credit score is higher than 700. Lenders offer a little more leniency, though. A good credit score depends on the loan program you need.
For example, for conventional loans, you need at least a 680 credit score. But if you apply for an FHA loan, lenders consider a 580 credit score good enough.
Focus on your credit history and less on the score when you are ready for a mortgage. We recommend looking at your credit at least 12 months before you apply for a mortgage. Are there things you can fix, such as late payments or overextended credit? Take the time to fix the issues and give your credit score time to improve. Scores can take several months to change, so give yourself ample time.
Related reference: Get your free credit report at Credit Karma, Credit Sesame and AnnualCreditReport
Conclusion to How to Get a Mortgage Pre-approval For a Home
Keep the mortgage pre-approval and application process simple. Enlist the help of a reputable realtor who can walk you through the process. Working together with your realtor, banker, and mortgage broker, you can secure your pre-approval, loan approval, and clear to close, making the home buying process easier than you thought.
A mortgage pre-approval does not replace the traditional budgeting process. A buyer should always critically review total income and expenses to establish the optimum monthly mortgage payment that won’t affect your household’s quality of life. Budgeting should still play a critical role when considering how much house you can buy.
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Pachalo Mkandawire
My name is Pachalo and I’m the author/owner of Investadisor.
I’m an extreme personal finance enthusiast and have been working in the financial industry for over a decade. An MBA student. The blog was started to further explore, learn, improve and share personal finance knowledge with the world.
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