If you are thinking about purchasing a home, the first step in the process is getting pre-approved. Pre-approval will help you understand how much house you can afford and will differentiate you from other home buyers when it comes time to place an offer on the house you want to make a home. Here are just a few of the benefits that come along with mortgage pre-approval.
- Smarter Shopping: Knowing your pre-approved loan amount will help you shop efficiently and save you the pain of falling in love with a home you cannot afford.
- Confident Choices: The pre-approval process gives you a chance to learn about the financing options available to you while you determine which loan program is best for you.
- Better Negotiations: With a pre-approval letter, both you and the seller will be confident that the funds are available if the offer is accepted.
- Accelerate Your Loan Process: Having an accurate pre-approval letter will minimize changes and challenges that may arise after you’ve submitted a contract on a home.
- Increased Buying Power: A pre-approval letter shows home sellers and real estate agents that you’re a serious buyer who’s ready to make an offer.
What are the 3 steps to get pre-approved for a mortgage?
Gather supporting documents for your mortgage pre-approval.
Mandatory for Everyone
- Federal Tax Returns: We’ll need all pages of your federal tax returns from the past two years.
- W2s and 1099s: The past two years of both documents are required.
- Consecutive Paystubs: We’ll need your most recent paystubs for the past 30 days.
- Asset Statements: All pages of these statements from the past two months are necessary. This covers a wide range of statements such as your checking, savings, stock, 401k, etc.
- Current Mortgage and Homeowner’s Insurance Statements: If you currently own a property, then we’ll require these statements.
- Driver’s License: We’ll need a copy of your driver’s license to show your identity. You can email this.
For Self-Employed Applicants
If you are self-employed, then your income is analyzed a little differently.
- Business Tax Returns: All pages of your business tax returns from the past two years are analyzed as this is also part of your finances as a business owner.
For Retirement Income
Some additional items will need to be provided if you have retirement income.
- Social Security Award Letter: You will need to submit a copy of the current year’s social security award letter.
- 1099s for Social Security: Your past two years of 1099s for social security. For pension income, you will need your award letter showing the monthly amount and 1099s from the past two years.
If You Have Child Support / Alimony Income
Finally, if this applies to you, then you will need to provide two more items.
- Divorce Decree/ Child Support Order: You will need to show your full divorce decree and child support order for pre-approval.
- Child Support Deposit: You will need to show the child support/ alimony being deposited into bank accounts for the past year. This shows proof you received this money.
Complete a pre-approval application.
Completing a pre-approval application is a fairly simple process and is based on the following factors:
- Proof of Income: An applicant’s income must be shown to a lender in order to prove that you can afford to pay back your mortgage every month. Pay stubs, W2s, and tax returns are all ways you can prove your income.
- Proof of Assets: The lender will want to see your assets to ensure you have enough money to pay a down payment on a home. You can do this by providing them with your last few bank statements, though other documents may be needed during the process.
- Credit Score: Lenders will also pull your credit report to see your credit score. If you have a high credit score, lenders will see that you are trustworthy and will be able to make on-time mortgage payments.
- Identification: Lastly, a lender will want to be sure you are who you claim to be. These documents can include your social security card, passport, and driver’s license. A signature indicating that you authorize credit checks will also be required.
Lender will process pre-approval
Once you have completed your pre-approval application and submitted the required documentation, your loan officer determines your loan amount and issues a pre-approval letter. Moreover, once you have your pre-approval letter you can begin house hunting for properties within your budget!
Review a Sample Pre-Approval Letter!
How long does it take to get pre-approved for a mortgage loan?
Getting pre-approved for a loan is a quick and simple process, especially when using our DML app. Once you have finished the loan application, we will review your financial documents and determine your pre-approval loan amount. Make sure to discuss the following factors with your loan officer when getting pre-approved to ensure an easy and stress-free process!
- Earnest Money Deposit: Earnest money is the amount you put on deposit with the seller. It’s called “good faith” money and lets the sellers know you’re serious about buying their home. Talk to your lender to discuss how you can be prepared to place your deposit.
- Monthly Payment Calculations: Your monthly payment will include taxes, homeowner’s insurance, PMI, principle, and interest. Taxes will be determined by the house you select. Once you receive your pre-approval letter, review your monthly payment to ensure the payment you are pre-approved for aligns with your budget. No one wants to be house poor. Use our mortgage calculator to determine how much your monthly payment will be so you can plan accordingly!
- Max Approval & Comfort Zone: You want to be certain that you are house shopping in a price range you are comfortable with, not your maximum pre-approval amount. See reasoning above!
- Out of Pocket Fees: When you find a house and go under contract, the appraisal will be ordered, and you, as the buyer will pay for the appraisal at the time of service. Out of pocket fees consist of anything that you as the home buyer are responsible for paying before closing.
- Your Loan: This is when the DML team will go over your loan: down payment amount, what is required, an overview of your mortgage payment, etc.
- Closing Costs: Closing costs consist of title fees, lender fees, the first year of homeowner’s insurance premiums, escrow setup, recording fees, etc. Sellers could pay all or a significant portion of closing costs. Speak with your real estate agent to learn your options..
How long does a mortgage pre-approval last?
Your pre-approval is typically good for the “shelf life” of the documents used. These will include a credit report, pay stubs, bank statements, W2s, tax returns, etc. The usable life of these documents will vary, yet it’s usually safe to say that your approval is good for up to 90 days.
During this time, it pays to keep all important financial documents so they’re readily available for future updates. Before making any major financial decisions, consult with your Loan Officer. These financial decisions are crucial to keep your pre-approval status. Below are different ways to stay financially conscious after you’ve become pre-approved.
- Do not miss loan payments: Before finalizing your mortgage, your credit will be reassessed. If you have missed any loan payments since going under contract, your credit could decrease which could result in terminating the loan. Remember, just because a lender issues your loan commitment does not mean everything is finalized.
- Avoid consolidating your debt: Debt consolidation can be tempting. Some debt consolidators may allow you to bring all your debt into one place. However, the hidden fees and interest rates that may increase exponentially may not improve your credit as expected. It is best to avoid this decision during your home buying process.
- Do not buy a car: This is one of the most frequently made mistakes. Your loan pre-approval is based on your credit score and current debt ratio. Buying a car will change both factors; this could make you unable to get your home loan.
- Do not change banks: Again, this is one that many people do not think will make a difference in their loan process. Your banking status and history is a part of the equation in getting you pre-approved for a loan. If this changes, you may not get your official approval.
- Avoid changing your job: Your employment history is considered during the mortgage financing process. This ensures you can repay your loan according to the terms. If you change jobs, a lender may think you are financially unstable, making you less appealing as a borrower.
Is a pre-qualification letter the same as a pre-approval?
Pre-approval and pre-qualification are both important and smart homebuying moves. However, these are two different terms, and both serve different purposes!
Pre-qualification is an informal estimate of what size mortgage you can qualify for based on an evaluation of your financial information. It is one of the earliest steps in the home-buying process and allows buyers to know how much they can expect to afford while entertaining the home search.
On the other hand, pre-approval is a formal statement of the specific mortgage amount for which you are approved for. This is based on a review of all your financial information and is usually a requirement. Your pre-approval letter will provide a letter on the specific amount that will be given to you.
Is it better to be pre-approved or pre-qualified?
While pre-qualification is a smart first step for establishing your personal budget for buying a home, a pre-approval letter is a necessary step in the process. Unlike pre-qualification, pre-approval is a more specific estimate of what you can afford. In other words, a pre-approval letter is more of a guarantee of loan approval than prequalification because it goes into much more detail regarding your finances.
Can you get pre-approved online?
Yes, the DML app allows you to easily start the pre-approval process directly from your mobile device or desktop. Specifically, it allows you to safely and securely upload documents right anywhere, anytime. Here are just a few of the features!
- Easy sign-up, plus self-serve tools and trusted guidance when needed.
- Automatic notifications, secure tools, and integrated tasks keep borrowers on track.
- Faster closing with continued convince and digital options.
Download the DML app today and learn how to navigate its features in our FREE Home Buyer Course!
Pre-approval based on credit history, debt to income ratio, income, employment, and down payment. Approval is subject to eligibility.
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