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Understanding a Loan Pre-Approval 101

By Tammy Emineth | February 22, 2024

Glossy online listings behind your computer screen might fuel your dream home fantasy, but the home-buying process truly begins in earnest when a lender is contacted to be pre-approved for a mortgage. This process is non-binding, however, a mortgage pre-approval reveals how much a lender is willing to lend you and what kind of mortgage you might be eligible to receive. Once this process is complete, the lender will provide you with a pre-approval letter.

Key Takeaways from this Article

  • Gather all documentation to get pre-approved, including your SSN, proof of income, banking information, and tax forms.
  • Make sure all your finances are squared away, including disputing incorrect data on your credit report or paying off existing debts to signal to lenders you can afford your mortgage.
  • The pre-approval does have an expiration date (3 months).

5 Steps for a Pre-Approval for a Home Loan

  1. Do a Free Credit Score Check. It might be in the back of your head, but before going to a lender, it is always helpful to know where you stand with your credit score. A credit score of 620 or higher is recommended to qualify for a mortgage, and a higher one will qualify you for better rates. A score of 740 or more will enable you to qualify for the best mortgage rates. Make sure your score is as high as possible before embarking on the home-buying journey.
  2. Know Your Credit History. Request copies of your credit reports, and if there is an issue spotted, you can dispute any errors. You can work closely with creditors to resolve the issues before applying.
  3. Calculate the Debt-to-Income Ratio. Your DTI, or debt-to-income ratio is the percentage of gross monthly income that goes toward debt payments, including credit cards and loans. You can use free debt-to-income ratio calculators to help you estimate your DTI based on current standing debts and a prospective mortgage. If monthly debts are prohibitively high, you might need to address issues by refinancing, getting on an income-based repayment plan, or paying down your debt aggressively.
  4. Gather Personal Information. This will include your SSN, current address, and employment details for both you and your co-borrower if you have one. Two other important personal informational items you will need are bank account information and proof of income. Documents needed to get a mortgage preapproval letter include W-2 tax forms, and 1099s if you have additional income sources and pay stubs. Lenders prefer two years of continuous employment, though there are always exceptions.
  5. Contact More than One Lender. San Jose Realtors offer these tips: Comparing offers from multiple lenders will help you compare rates and fees to save you thousands from your pocket over a 30-year mortgage. Preapproval involves a hard inquiry, your credit score might experience a slight hit. However, you will get dinged one at a time rather than penalized for every lender that grants you pre-approval. FICO is the largest U.S. credit scoring company, and it recommends confining applications to a limited time frame, like 30 days.

When Should You Get Pre-Approved?

A mortgage pre-approval is an offer by your lender to loan you a certain amount under specific terms. The offer will expire after a certain amount of time (30-90 days), and it is important to read the fine print for how long your pre-approval letter is valid. You should apply when you are ready to start seriously looking for homes and are prepared to make an offer. It is important to understand that just because you were pre-approved, it is not a guarantee that you will receive a loan, and the mortgage can be denied worst-case scenario. It is crucial to avoid financial moves after preapproval that can make you appear riskier to lenders.

Tammy Emineth is a writer, blogger, and real estate marketing expert for over 15 years. As a former real estate agent, Tammy possesses the knowledge and expertise to produce content and relevant information about the real estate market and how to market real estate websites and brokerages.
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