Before You Go Home Shopping, Get That Mortgage Pre Approval
You’re excited about purchasing a home and you know exactly all of the qualities you look for in it. However, you should hit the brakes and obtain a mortgage pre approval letter. This letter is a statement from your lender stating how much money you’re able to borrow for a new home. The preapproval letter will also state the interest rate that you qualify for. One reason why it’s vital to get the letter is that it gives you an idea of how much you can afford on the house. A mortgage pre approval letter will make you appear a more serious buyer to sellers in a sellers’ market. It reduces delays in closing. Here is more information on the mortgage approval letter.
How the Process Works
Before you meet with the lender, you need to prepare yourself with the right documents. Start by going to AnnualCreditReport.com to obtain copies of your credit reports from these credit bureaus; TransUnion, Equifax, and Experian. If you see outstanding debts that you owe, contact your creditors and develop a feasible payment plan to pay down your debts. This is important because if your debts exceed your income, you could be denied. Dispute any errors on your credit reports. You will also need a copy of your Social Security card, your W-2 forms, tax returns from the past two years, pay stubs, and proof of any assets such as investments. The lender will then review your documents then make a decision.
Choosing the Right Mortgage Lender
You want to make sure that you choose the best mortgage lender to obtain the preapproval letter. Never settle for the first lender you come across. It’s best to research multiple lenders and compare the different terms, fees, down payment requirements, and rates before making a final choice. Ask your realtor for recommendations as well as family and friends. Some questions to ask the lender include:
- How much will I need to put down on the home?
- What are your interest rates?
- What will the estimated closing costs be for the loan?
- Are there other fees and costs associated with the loan?
- What issues could delay the closing process?
Visit different lenders’ websites and read legitimate online reviews from credible sites such as NerdWallet to get an idea of the lenders’ reputations and what they offer. When you talk with a lender, you want to find out what types of loans they offer. You might be interested in an FHA loan but then find out that a certain lender doesn’t provide it. The lender should also be able to tell you which type of loan will work the best for you. Look for a lender that does underwriting in-house because it makes for an efficient closing process.
Length of Time Before Approval
If you have all of your documents ready to present to the lender, you should get a response within a day or two. However, if your credit score is low or if there are more documents you need to present to the lender, then the response will take longer. This is why you need to gather all of your documents and fix credit issues at least a year before you meet with a lender.
Pre Approvals Have Expiration Dates
It’s important to note that mortgage pre approvals have expiration dates so this means that you’re not obligated to work with a certain lender because you have the letter. In addition, your financial situation can change for various reasons, and you might not qualify for that same loan as a result.
Common Mortgage Pre Approval Mistakes
Here are some mistakes you should avoid when applying for a mortgage pre approval. If you have been approved by a lender, there are some things you shouldn’t do. These include quitting your job, applying for new credit, and buying extravagant items with new credit. Paying off a chunk of debt during the approval process is also not a good idea because it eats up any cash reserves you have and lenders will want to know how you obtained the money to do it. Other mistakes include:
- Not saving enough for a down payment
- Not giving the lender important documents on time
- Missing bill payments
- Making unaccounted cash deposits to your checking account
Don’t Buy More Homes Than You Can Afford
You shouldn’t buy more homes than you can afford because this causes you stress when trying to pay a high monthly mortgage. If the lender says that you can borrow $300,000 for a new home, borrow less than that amount. Another reason you should do this is that you need to budget for additional costs of homeownership such as maintenance, homeowners insurance, utilities, and property taxes.
What If I’m Self-Employed?
Self-employed borrowers will still need to present the same documentation as non-business owners, but they will also need to present their 1040 tax returns to the lenders. Be prepared to pay more for your mortgage if you’re self-employed because some lenders might view you as high-risk. You can improve your chances of getting approved by reducing your debt load, keeping business affairs separate from personal ones, and possibly putting down a larger down payment. A credit score of 700 or more can also work in your favor.
How Will Applying Affect My Credit Score?
When you apply for mortgage pre approval, your credit score will decrease temporarily because it is a hard inquiry. However, it’s important to note that if you apply to multiple lenders within a 45-day time frame, the credit bureaus will view these as a single inquiry. This is good news if you’re trying to compare different lenders but are concerned about how it affects your credit score.
Don’t Rush Into Choosing a Lender
The choice of a great lender is one you shouldn’t take lightly. Do thorough research and talk to as many lenders as you need to. There will always be homes for sale, and it’s better to take your time than to sign a mortgage that you’ll regret later because you wanted a certain home.
If you’re a first-time homebuyer who needs assistance with choosing the right home, contact us. We will make the process easier for you to understand, and we can answer any questions you may have.