Prior to submitting a completed mortgage application, while you are still at the stage of choosing the right lender, you can try to prequalify and get an idea of how much a lender is willing to lend and through which program. The most important thing to note is that you don’t have to lose anything during a prequalification process.
Next you can think of getting pre-approved at some select lenders. Note a pre-approval process involves credit verification and several other steps as necessary according to the mortgage underwriting guidelines of the loan provider. You are still away from the final approval but you will be able to obtain conditional approval from the lender in writing.
Getting Prequalified
Why get prequalified?
You will get to know two important things when you prequalify.
- An estimate of the loan amount a lender is willing to offer
- The type of mortgage loan that is right for you
What are the different mortgage types?
Besides, the following are some of the advantages associated with prequalification.
- No cost
- No credit check
- No documents
- Can be done online
You only need to provide information about current financial condition to prequalify. The downside is that the loan is not guaranteed as there is no formal commitment from the lender.
When you are ready to get prequalified?
The guidelines may differ from one lender to another. For FHA loans, however, you must have the following to begin prequalification at a lender.
- Two years of continuous employment history at the same company
- No decrease in income in the past two years
- Good credit standing and no late payment in recent history
- No bankruptcy in the last two years
- No foreclosure in the last three years
- Mortgage payment must not be more than one-third of the total monthly gross income
Some Tips
- A lender may prequalify you for more than what you can comfortably afford. If this is the case, it is only prudent to stick to the loan amount that is perfectly within your budget.
- You should avoid sharing the maximum prequalification amount with real estate professionals and ask them instead to show you houses that are within your budget.
- If you are working with a seller’s real estate agent, you should avoid disclosing your maximum budget as you may find it difficult to negotiate later.
- Since prequalification is not binding to you or the lender, you are free to research more and find a better deal from another lender.
What are some of the tips to choose the right mortgage lender?
Getting Pre-Approved
What is Pre-Approval?
A pre-approval is a written statement from a lender stating the lender’s willingness to offer a particular loan amount based on the borrower’s creditworthiness and present financial condition. In other words, the lender is committed to lend provided the conditions laid out are met by the borrower. Borrowers must note that the loan is still not guaranteed and getting pre-approved can only bring you closer to the loan approval.
Why get pre-approved?
A pre-approval process is a more serious one, involving detailed analysis of borrower’s credit reports, loan application, debt, and savings. Moreover, your loan has also been reviewed by an underwriter. It also allows you to pass through the two C’s of underwriting – Capacity and Credit. All you now need is Collateral to get fully approved for the loan.
It generally takes 24 to 48 hours to get pre-approved. The lender will offer you a pre-approval letter, which is good for 60 to 90 days. You are one step ahead with a pre-approval letter as you can show this letter to real estate agents and sellers to prove that you are a credible buyer.
What you need for mortgage pre-approval?
To get pre-approved, you need to provide documents that show your income, assets and creditworthiness. Generally, a lender will ask for your Social Security Number and permission to pull your credit report. If you have a co-borrower, you will also be required to provide similar information about them.
Here are some of the documents you need to apply and get pre-approved.
What if you failed to get pre-approved?
In case you are not pre-approved, you can discuss with your lender and provide additional information about your financial condition. You may also have to do things, such as improve credit score, correct any errors in your credit report, bring your debt-to-income ratio to an acceptable level and increase your down payment amount. Don’t try to provide wrong information and indulge into loan fraud. It may result in civil liability or criminal penalties.
Here is how you can improve your credit score.
What is a debt-to-income ratio?
Pre-approval is usually the first step of mortgage application and your lender must provide you with documents, such as the Good Faith Estimate and the Truth-in-Lending Disclosure Statement within a few days of application. This is mandatory under Real Estate Settlement Procedures Act (RESPA).
What does Good Faith Estimate contains?
Here are some of the things that you should not do after getting pre-approved.