Getting mortgage preapproval is an essential step in the home-buying process. It gives you a clear picture of your budget and shows sellers you’re a serious buyer. Here’s how to get preapproved:
1. Understand What Preapproval Is
- Prequalification: A preliminary estimate of how much you might qualify to borrow. It’s less formal.
- Preapproval: A lender’s commitment to lend you a specific amount based on your financial situation. It involves a detailed review of your finances.
2. Check Your Credit Score
- Review your credit report for errors and work on improving your score if needed.
- Most lenders prefer scores of at least 620 for conventional loans, but government-backed loans like FHA may accept lower scores.
3. Gather Your Financial Documents
Prepare the following paperwork for the preapproval process:
- Income Verification: Pay stubs (last 30 days), W-2s (last 2 years), and tax returns.
- Bank Statements: Documentation for the last 2-3 months.
- Proof of Assets: Savings accounts, investments, or other assets to show financial stability.
- Debt Information: Current loans, credit card balances, and monthly obligations.
- Employment Verification: Letter from your employer or contact information for verification.
4. Calculate Your Debt-to-Income Ratio (DTI)
Lenders will assess your ability to repay the loan by calculating your DTI ratio:
- Divide your monthly debt payments by your gross monthly income.
- Ideally, your DTI should be below 43%, though some programs allow for higher ratios.
5. Choose a Lender
- Research lenders to find one offering competitive rates and terms. Consider banks, credit unions, and online lenders.
- Request quotes from multiple lenders to compare options and find the best fit.
6. Submit Your Application
Complete the preapproval application with your chosen lender, providing the documents listed above.
- Be honest about your financial situation to avoid issues during underwriting.
7. Expect a Hard Credit Check
- Lenders will perform a hard inquiry on your credit, which may temporarily lower your score by a few points.
- Ensure you’re serious about preapproval before applying to avoid unnecessary credit checks.
8. Review Your Preapproval Letter
Once approved, you’ll receive a preapproval letter outlining:
- The loan amount you qualify for.
- The estimated interest rate and loan terms.
- Any conditions you need to meet (e.g., selling an existing property or providing additional documents).
9. Use Your Preapproval Wisely
- Duration: Preapproval letters are typically valid for 60-90 days, depending on the lender.
- Budget: Stick to the loan amount or less, keeping in mind additional costs like taxes and insurance.
- Negotiation: A preapproval letter strengthens your offer when negotiating with sellers.
10. Keep Your Finances Stable
Avoid significant financial changes during the home-buying process, such as:
- Opening new credit lines.
- Making large purchases.
- Changing jobs.
Key Benefits of Preapproval
- Confidence: Know your budget and focus on homes within your price range.
- Leverage: Stand out in competitive markets by showing sellers you’re a serious and qualified buyer.