If you’re serious about buying a home, securing a mortgage pre-approval letter from a potential lender is key. This lets you know how much house you can afford and shows real estate agents and home sellers that you’re a serious buyer qualified to tour homes in your price range. Plus, it’s a good way to see which mortgage lenders are willing to work with you and open a dialogue about mortgage terms and conditions.
You can get pre-approved for a mortgage in just a few simple steps:
You are entitled to one free credit report per year from each of the three major credit reporting bureaus—Experian, Equifax and TransUnion. Each agency’s report will document your debts and credit history, which lenders will use to make decisions.
If you haven’t done so in the last 12 months, go to www.annualcreditreport.com to get your free reports. Check them carefully to ensure their accuracy. If you find errors that are hurting your score, dispute them. Ideally, you’ll resolve them prior to approaching potential lenders so that you’ll be able to secure pre-approval for a potential mortgage and set yourself up for the most advantageous terms for your loan.
Make sure the lenders you’re considering are reputable and familiarize yourself with their mortgage products, programs, fees and interest rates. Some are better able to offer terms and conditions tailored to your situation and may even be local. Having several potential lenders to work with offers flexibility and the opportunity to compare financing offers—especially if you’re going to be looking for a unique property.
To assess your financial character, debt-to-income ratio and ability to repay a loan, lenders typically request a range of financial documents—as well as identification—that prove you are who you say you are. The Uniform Residential Loan Application, Form 1003, is an industry standard for assessing a potential borrower’s income, assets, and debts. Documents typically needed include W-2s or 1099s, pay stubs and points of contact for employment information, banking statements, car or student loan documentation, and financial statements for retirement or investment accounts. Lenders will also need a valid photo ID—a driver’s license, for example—and your Social Security number.
Since mortgages are typically a monthly payment, lenders look at how much money your debts account for on a monthly basis versus how much income you can count on in that same time frame. If you divide your total monthly debt payments by your gross monthly income, that calculation yields a number that represents your debt-to-income ratio as a percentage.
Ideally, lenders prefer numbers that are under the 43-percent threshold and that remain under that threshold through closing. Applying for new credit, incurring credit balances or taking on a large debt can jeopardize your pre-approval or the final mortgage loan approval.
Once you have your financial affairs in order, you’re ready to actually apply to a lender to see if they’ll work with you. Most lenders will have you complete a Uniform Residential Loan Application and will then do a hard pull or inquiry on your credit.
Once the lender has determined how much they’re willing to lend you, they’ll issue a letter indicating that you’re pre-approved for a mortgage up to a certain dollar amount for a certain period of time—60 days, for example. Pre-approval letters may also indicate the loan program that will apply to your mortgage as well as the proposed interest rate and down-payment expectations. If a specific property is involved, the pre-approval will include that information as well. In some cases, the lender may request additional documentation or financial adjustments to ensure your financial situation meets their loan approval criteria.
To keep your pre-approval letter in force and ensure final loan approval, your lender will expect you to do three things:
Remain current on all of your financial responsibilities to maintain your credit score.
Maintain or even lower your debt-to-income ratio. Increases in debt can jeopardize final mortgage loan approval or alter loan terms and conditions.
Choose a home that will meet your lender’s loan-to-value parameters. The purchase price, appraised value, loan amount and down payment must align to satisfy your lender’s loan underwriters.
Having a mortgage loan pre-approval letter in hand certifies you as a serious buyer ready to place a contract on a property. It confirms how much house you can afford and gives you the security of knowing you’re able to make an offer on the home you fall in love with.
If you'd like to learn more about how to get pre-approved for a mortgage, you can visit La Capitol Federal Credit Union’s online Mortgage Center. Check your finances, and let us help you get ready to buy a house.