How do you get preapproved for a mortgage as a first time buyer? What can you do to increase your preapproval limit when buying a new home with a loan? And in what way can a preapproval mortgage calculator help you when purchasing your dream home?
When it comes to home buying with a loan, mortgage pre-qualification is considered a learner’s permit while mortgage preapproval is a license to drive.
Why is getting preapproved for a mortgage important in the home selling process? When you present a preapproval letter to your real estate agent or home seller, they will know that you are serious about your homeownership. Without it, you will have a lot of delay.
The importance of having a mortgage preapproval letter can’t be overemphasized when you consider the pressure it takes off your home search and purchasing process.
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What is the Difference Between a Mortgage Pre-qualification and Preapproval?
What is mortgage pre-qualification?
Mortgage pre-qualification is the process where a mortgage lender collects some basic financial information from one intending to purchase a home so as to estimate how much house you can afford.
It’s the first step you will have to take when you are not sure you are financially ready to afford a home. Your mortgage lender uses your financial information like your credit, debt, income and assets to estimate how much you can borrow and to even know if you actually qualify for a mortgage.
If you are able to get a pre-qualification letter from your mortgage lender that indicates you are financially capable to purchase your dream home, the next line of action will be to get preapproved for a mortgage.
What is mortgage preapproval?
Mortgage preapproval in the United States is the process whereby a lender reviews your credit report to ascertain if your income, debts and assets can afford you the amount you need and then goes ahead to pre-approve you for that.
If you’ve worked with a credit repair company to help fix your credit, you have a steady income and lesser debt, you can start shopping for a new home to purchase. That will also mean that you can skip the pre-qualification process and go straight to preapproval.
A mortgage preapproval is an offer by a lender to loan you a certain amount under specific terms. The offer expires after a particular period, such as 90 days.
Getting a preapproval letter from your lender is not a guarantee that you will get the loan. A preapproval letter only indicates the amount and type of loan for which you are approved.
After you are preapproved for a mortgage, do not do any of these things: applying for new credit, making large purchases, or missing loan and credit card payments.
A Step-by-Step Guide on How to Get Preapproved for a Mortgage in the U.S
1. Get to know what your credit score is
Knowing exactly what your credit score is before approaching a mortgage lender is one of the smartest decisions you will make. Your credit score must not be less than 620, otherwise qualifying for a home loan will be a struggle.
If you want to get the best mortgage rate in the United States we recommend having a credit score of 740 or above.
2. Re-examine your credit history so as to get preapproved for a mortgage
Before filling a mortgage application, request for copies of your credit reports and dispute any errors you discover. The services of a reliable and professional credit repair agent near you will be needed to help resolve issues emanating from delinquent accounts.
3. Lower your debt-to-income ratio (DTI ratio)
Your debt-to-income ratio measures all of your monthly debts against your monthly income. In other words, it is the percentage of your gross monthly income that goes toward debt payments. These debt payments include your student loans, car loans, and credit card.
Having a lower DTI ratio can qualify you for a more competitive interest rate be it in the U.S., Canada, Australia or the UK. Before approaching any bank or traditional lender for a loan to buy a new home, pay down as much debt as possible.
By using a debt-to-income ratio calculator, you can estimate your DTI based on the present debts and the expected mortgage. With a DTI of 36% and below, lenders will be more eager to approve your home loan. In other words, you will get preapproved for a mortgage.
4. To get preapproved for a mortgage, gather information about your monthly income, financial account, borrower information and personal information
Some of the personal information you will need to get preapproved for a home loan are your Social Security numbers, current addresses, borrower’s information and the employment details.
You will also need bank and investment account information and your proof of monthly income. Documents you will need to get a mortgage preapproval letter include your W-2 tax form and 1099s if you have additional income sources and pay stubs.
How long do you have to be employed before you can use it to apply for a mortgage? Two years of continuous employment is preferred, but there are exceptions. Self-employed applicants will likely have to provide two years of income tax returns. If your down payment will be coming from a gift or the sale of an asset, you will be required to present a paper trail to prove it.
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5. Shop around for a lender
Most mortgage companies in their TV commercials promise to pre-qualify you in minutes. While this can be possible, it has absolutely no real value until you are pre-approved for a mortgage. But the question is, will going to more than one lender affect your credit score negatively? The answer is no.
You can save more money for yourself when you compare offers from multiple lenders to see their various mortgage rates and fees. These days, credit bureaus have agreed to treat all pre-approval inquiries as one, as long as they occur within 30 days.