Purchasing a home is an exciting process in which homebuyers will get to explore what they want in their potential forever home. One of the first steps in purchasing that home is finding a qualified lender and getting preapproved for a home loan amount, or in other words, your mortgage. The steps to getting preapproved can be tedious but not too difficult in the grand scheme of the purchasing process. To help alleviate some of the burdens, we’ve organized our top tips and guidance for you here.
What is Preapproval?
To keep it brief, the preapproval process is one in which a lender certifies that you qualify for a home loan at their institution for a certain amount. And typically, this is one of the first steps you will take in the home buying process, as the preapproval amount will set the course for the rest of your homebuying journey.
In some cases, agents won’t even work with you if you do not have a preapproval letter from a credited institution. Additionally, some homeowners, especially those in the luxury sector, will not let you tour their homes until you provide proof of preapproval. Think of a preapproval letter is your golden ticket, certifying your purchasing power and putting you in the fast lane to finding a house you love.
Steps to Preapproval
There are quite a few steps to get you to a place where you can say you are preapproved. However, it is not difficult, just a matter of self-reflection, researching, and gathering all of the necessary documents.
1. Consider If You’re Ready to Move
If you’re reading this, chances are you’ve thought extensively about purchasing a home, and in that case – good for you! However, it’s essential that before seeking preapproval, you analyze whether you’re ready to buy a home. Questions to ask yourself include if you have enough money saved for a down payment if your employment status is stable if you will be able to make your mortgage payments, and more. While many people want to buy a home, not all are ready – sit down and sort through your finances to be sure you’re in a place to purchase.
2. Check Your Credit Score & Calculate Your DTI
Your preapproval amount depends heavily on your credit score. To ensure that you are ready for preapproval, you should have a base idea of your credit score to avoid surprises. Depending on the type of loan you are going for, you may only need a score of as little as 620. With that being said, the better your score, the better your loan offer, meaning lower interest and more purchasing power.
If you find any major red flags upon checking your score, such as years-old disputes, you can begin the credit recovery process before seeking preapproval. Finding out these issues ahead of time will save a lot of headaches in the long run. Hand in hand, You may also work on calculating your debt-to-income ratio (DTI), which is a number that is factored into your preapproval status. If too high, you may need to pay off some debt before being approved for a higher quantity.
3. Research Lenders
After having a baseline for your finances and building your buyer’s confidence, you can look for a well-qualified lender in your area. It may be worthwhile to list a few potential lenders so that you can research them further before committing to one.
While years of experience, reviews, and awards are great at face value, it’s important first and foremost that you mesh well with everyone you’re choosing to involve in your home buying process. Remember that you’re the boss here, and you hold power in who you allow on your team. Interviews and meetings prior to committing to one person are fair game.
Gather Necessary Documents
You will need a few documents for the preapproval process. Once you’ve selected a lender, they can help guide you further on what you need specifically for your case, but generally, they may include:
- Proof of Identity
- Bank Information & Statements
- Investment Account Information
- W-2 Tax Form or 1099 if a contracted employee.
- Pay Stubs
- Certification of Employment
- Tax Returns (federal and state, usually two years).
- Real Estate/Rental Income (properties you own, whether rental or second residences).
- Asset Information
- Retirement Funds
- Debt Payments
- Current Home Payments or Rental Payments.
- Landlord Information (if renting)
- Child Support Payments
- Bankruptcy or Foreclosure Information
- Down Payment Proof (can include: assistance programs, gifts, etc.).
Keeping Your Preapproval Status
Congratulations, you’ve been preapproved! Now what? Well, you can expect your preapproval status to last anywhere from one to three months, on average. In that time, while you search for a home, it’s crucial that you do not significantly change any of the information used to prequalify you. Otherwise, your run the risk of nulling that preapproval. Examples of this include transferring large amounts of money, taking out a large loan, or leaving your job.
Though it might seem a little frightening, preapproval, though tedious, is a process that allows you to feel confident as a buyer knowing what you can afford early on in the home buying process. It’s a step every prospective homebuyer will need to take early on in their home buying processes, and with the help of a well-qualified lender on your side, it will be quick and painless.
Are Preapproval and Prequalification the Same Thing?
Preapproval and prequalification are two separate processes, and preapproval will usually come after prequalification. Preapproval is a more thorough process where creditors will take a deep dive into your financials and background to qualify you for a loan. Prequalification is simply your lender looking at surface-level documents to find what you are qualified for, meaning it is not as accurate as a preapproval.
What Happens if I Am Denied Preapproval?
Typically, when you’re denied preapproval, it is because there is an issue with your credit score. Before you can be approved, you will need to address any discrepancies in your reports. The lender who informed you of your denial should also provide information on the next steps necessary to get you to your ultimate goal of preapproval.
How Long Does the Pre-approval Process Take?
After all of the documents are received by your lender, preapproval can take as little as a couple of days. If you’re eager, the good news is that you can ask about your application throughout the process to ensure things are headed in the right direction.