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Getting pre-approved for a mortgage loan is very important. If you are thinking about buying a house, you'll need to know how much the bank is willing to lend you and what your mortgage might cost. You'll also need to be ready to show your pre-approval letter to sellers when you make an offer. They'll want to see it so they know you can actually get the financing you need to go through with the deal.
The process of getting pre-approved can be more complicated than just going online, submitting some basic information, and finding out your rate -- this is also known as getting pre-qualified. Pre-approval requires you to actually submit some financial details to mortgage lenders. They'll evaluate you, and, if everything looks good, you should be given a pre-approval letter and be able to lock in your rate. This doesn't guarantee you a loan but it does mean that if the house is OK and your financial situation stays stable, you should be able to move forward with borrowing.
So, what exactly will you need to provide to your lender to get pre-approved? Here are three things most mortgage lenders are going to need.
1. Proof of income
Mortgage lenders are going to want to see proof of how much money you make. That's because the amount you are allowed to borrow is based on your income (and your debt levels). Most lenders want you to keep your monthly mortgage payments below 28% of income and your total debt including your mortgage and other payments below 36% of your income. (This is called the 28/36 rule.) While there are exceptions, this ratio will give you the best chance of getting an affordable loan from a variety of lenders.
Lenders don't just trust you when it comes to your income. They'll want to see pay stubs and tax returns. And ideally, you will be able to show your earnings have been steady for the two years before you're applying for the loan. So be sure to have these documents ready when you apply.
2. Proof of assets
In most cases, you're going to need a down payment when you borrow money for a home. While some lenders allow you to get a loan with as little as 3% down (or even no down payment at all), most require around 10% to 20% down. And if you don't want to have to pay an added cost for private mortgage insurance (a fee tacked onto your mortgage that protects the lender if you default on your payments), you'll need 20% down.
Lenders want to see that you have this money, so they will most likely ask for bank statements as well as for statements for other accounts like those with a brokerage firm. Some mortgage loan providers also require you to have assets in reserve, which is basically a fancy way of showing you have enough to pay your mortgage for several months, in case of an income interruption.
Be ready with bank statements, brokerage account statements, and evidence of other assets such as statements for cash value life insurance and retirement accounts.
3. Your credit score
Finally, lenders want to see your credit score. You usually won't provide this, but will instead give them permission to pull your credit report directly from one of the credit reporting agencies. Some loans, like those backed by the government, are available with scores as low as 500, but most lenders want a FICO® Score of 620 or higher for a conventional mortgage loan.
You should be ready with all of this information so you can get through the pre-approval process as quickly as possible. Start gathering your paperwork today so you can get your home loan application submitted and have a better shot at finding the home of your dreams.
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