When you’re ready to buy a home, getting pre-approved for a mortgage is one step you shouldn’t overlook.
Mortgage pre-approval means that a lender has conditionally approved you for a set home loan amount, based on your credit and finances. Having a mortgage pre-approval letter in your pocket can streamline the mortgage application process later since the lender already has your information and has verified your documents.
Although some information can change and the lender may need to re-verify some of your documents, your credit standing cannot change during the commitment period without impacting your loan. Changes in the financial conditional and application information could jeopardize the approval status of the application. Avoid taking on additional credit obligations during this period. Additional contingencies may include an approval up to a maximum interest rate since the rate cannot be locked until the ratified purchase contract is received.
A pre-approval can also give you an edge when you’re ready to make an offer on your new home. The pre-approval shows sellers that you’re committed to buying and that you can back up your offer with financing. In a bidding war, a pre-approved buyer may win over a buyer who hasn’t started the application process.
Getting pre-approved for a home loan starts with knowing what to expect.
Check Your Credit
At least three months before you reach out to a lender for a pre-approval, it’s a good idea to review your credit report. This way, you’ll have an idea of what your lender will see and how that might influence your odds of obtaining a pre-approval.
Look for any errors or inaccuracies that could be hurting your credit score. Take steps to dispute the errors, and then follow up one to three months later to verify that they have been corrected. Disputes can take time to resolve.
Organize Documents for Your Pre-approval
You’ll need certain documents for a mortgage pre-approval. Get them organized and ready to go for a smooth pre-approval process. The paperwork your lender will need includes:
- Personal information: You’ll need to provide your Social Security number and date of birth so the lender can order a copy of your credit report.
- Income information: Your lender will want to see documentation for all sources of income, such as W-2s, pay stubs, recent tax returns, and a profit-and-loss statement if you’re self-employed, as well as additional sources of income, such as Veteran’s Administration (VA) benefits or retirement benefits. If you receive child support or alimony and want to use that income to qualify for your mortgage, you will need to provide the relevant documentation. You do not have to disclose income you receive from a current or former spouse if you don’t want to rely on it to qualify for your loan.
- Asset information: Your lender will need copies of recent bank and investment account statements, as well as estimated values for any property you own, such as real estate or vehicles.
Time Your Pre-approval
You can get pre-approved for a mortgage at any time, but generally, it’s better to do it as close to the time you plan to shop for a home as possible. There are two reasons for that.
First, mortgage pre-approvals don’t last forever; typically, they’re good for 60 to 90 days. Apply for a pre-approval too early and you run the risk of it expiring before you’re ready to make an offer on a home. If that happens, you may have to start the pre-approval process all over. If you have to get a second mortgage pre-approval after the rate-shopping window closes, your credit score may reflect at least one inquiry.
Second, mortgage pre-approvals result in a hard inquiry into your credit history. That means the inquiry gets factored into your credit score. Each new inquiry for credit has the potential to lower your score by a few points, but the credit agencies allow you some time to shop around for the best home loan. Here’s how it works.
All inquiries are coded to show what kind of lender is checking your credit. The impact from applying for credit will vary from person to person based on their unique credit histories. Looking for a mortgage may cause multiple lenders to request your credit report. To compensate for this, the Fair Isaac Corporation (FICO) Scores ignore mortgage inquiries made in the 30 days prior to the lender pulling your credit report. So, if you get a pre-approval done within a 30-day window, the inquiries should not affect your scores while you’re rate shopping – In addition, FICO Scores look at your credit report for mortgage inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO Scores.
Home-buying has its challenges, especially if you’re a first-time buyer, but getting pre-approved shouldn’t be one of them.