How to get preapproved for a mortgage

It’s important to check your credit score before getting preapproved for a mortgage, because lenders often have minimum credit score requirements for their loans.

While each lender sets its own credit requirements, minimum credit scores also vary by loan type:

Conventional mortgage	620
FHA loan	580 with a 3.5% down payment, or 500 with a 10% down payment
VA loan	Varies by lender, but usually 620
USDA loan	Varies by lender, but usually 640

If your score falls below these requirements, you may need to focus on improving it before buying a house. There are several ways to do this, including:

Paying down credit card balances
Pay debts on time
Not opening new lines of credit
Keeping older credit lines open after paying them off

Learn more: What credit score do you need to buy a house?

2. Calculate your debt-to-income ratio

Before you get preapproved, it’s a good idea to check your debt-to-income (DTI) ratio as well. Your DTI ratio is one of the biggest factors lenders consider when you apply for a mortgage. You can calculate this figure by adding up your monthly debt payments — including your prospective mortgage — then dividing that total by your gross monthly income, and multiplying the result by 100.

DTI example

Let’s say your prospective monthly mortgage payment is $2,000, and you also pay $1,000 per month toward your car and student loans. Your pre-tax monthly income is $9,000.

($2,000 + $1,000) / $9,000 x 100 = 33.3333%

Most lenders require a DTI ratio below 50% to qualify for a mortgage, but the exact limit varies by lender. With a DTI ratio of 36% or less, you’ll typically get the most favorable loan terms and interest rate.

If your DTI ratio isn’t ideal, consider working on it before you apply. You can do this by paying off existing debt, making extra debt payments each month or increasing your income. You should also avoid opening any new credit accounts or taking on any new loans.

Learn more: What percentage of your income should go toward a mortgage?

3. Gather personal and financial documents

You’ll need to supply documentation for a mortgage preapproval, including information about your income, assets and debts. These documents typically include the following:

Pay stubs from at least the past 30 days
W-2s from the past two years
Proof of any other income sources, such as bonuses or commissions, child support or rental revenue
Account statements — including checking, CDs and retirement savings — from at least the past two months
Documents detailing any loans you currently have
Letters explaining any new loans you’ve taken out recently
Gift letters from anyone giving you money to use for a down payment
Court records, if you’re recently divorced or dealt with something like bankruptcy or foreclosure
Contact info for your landlords if the lender wants to verify payment
ID — such as a driver’s license or passport — so lenders can verify your identity and citizenship. Foreign nationals can get financing, but it’s much more complicated.

Self-employed professionals might need to undergo a more involved process. For example, a lender may review your business records, such as profit-and-loss statements.

Lenders typically ask for the same types of documents, so it’s best to have them all organized before you begin applying.

4. Choose a few mortgage lenders

To get the best rates and fees, it’s important to shop around. At this stage, you’ll be selecting lenders — ideally three or more — with whom you’ll apply for preapproval. You can typically see rate quotes and review loan options online to get a sense of which lenders might be a good fit. You should also read lender reviews to learn about customers’ experiences.

Applying for multiple preapprovals will allow you to compare mortgage offers later.

5. Get preapproved

In many cases, you can get preapproved for a mortgage by submitting an online application. You may also be able to do it over the phone, and if you prefer, you can usually meet with a lender at a local bank branch.

During preapproval, lenders will verify the personal and financial information you submit and use it to decide whether you qualify for a mortgage and, if so, how much to lend you.

If you do receive preapproval, you’ll receive a letter stating the amount you’re approved to borrow and the expiration date of your preapproval. You’ll also see the loan type and terms in this letter.

Learn more: Compare 30-year mortgage rates

How does a preapproval impact my credit?

During preapproval, lenders will conduct a hard credit inquiry, or “pull,” of your credit. They do this to assess your credit utilization ratio, or how close the outstanding balances on all your credit cards are to your total credit limits. The lower your credit utilization ratio, the better your chances of getting preapproved for a mortgage.

The hard pull will reduce your credit score by a few points, but that minor impact decreases over time until it falls off your credit report after two years. The upside is that multiple hard pulls for mortgage preapproval can be grouped into a single entry on your credit history. If you want to compare offers, try to get preapproved by multiple lenders within 45 days to limit the impact on your credit score.

Mortgage preapproval vs. prequalification

Preapproval and prequalification sound similar, but they differ in crucial ways.

Prequalification: Prequalifying for a mortgage gives you a rough idea of the amount of financing you might be able to get. However, prequalifications are typically based on self-reported information that the lender doesn’t verify. There’s no commitment from the lender, and prequalifications aren’t very compelling to sellers.
Preapproval: With a preapproval, the lender verifies your financial information and provisionally agrees to lend you a certain amount. A preapproval shows sellers that you can afford the purchase.

Mortgage preapproval vs. mortgage final approval

Just as prequalification and preapproval are different, preapproval differs from actually applying for a mortgage, too. While you’re very likely to receive a mortgage if you’re preapproved, it’s also possible to be preapproved and have your official mortgage application rejected.

Preapproval: Preapproval doesn’t guarantee you a loan; it’s just one step toward approval. The lender gives your finances a brief overview and, based on that, agrees in principle to loan you funds.
Final approval: The lender authorizes your application to borrow funds to buy a particular property. It thoroughly reviews your finances and pending purchase, including verifying employment and income, and evaluating the home. If something unexpected comes back during this underwriting review — or if your financial situation changes — you might not qualify for a loan or find the details of your loan have changed.

What is conditional approval?

If you receive conditional approval after applying for a mortgage, it means the lender is likely to grant final approval — provided you meet certain conditions. Often, this means providing additional documents (like bank statements or a gift letter), employment verification, proof of homeowners insurance or a home appraisal report.

How far in advance should you get preapproved for a mortgage?

The best time to get a mortgage preapproval is before you start looking for a home. If you find a home you love but don’t have a preapproval in hand, you likely won’t have time to get preapproved before you need to make an offer — and many sellers won’t even consider offers from buyers who aren’t preapproved.

Many mortgage preapprovals are valid for 90 days, though some lenders will only authorize a 30- or 60-day preapproval. If your preapproval expires, getting it renewed can be as simple as your lender rechecking your credit and finances to ensure there have been no major changes to your situation. Just keep in mind that this might count as another hard pull against your credit, dropping your score by a few points.

How long does it take to get preapproved for a mortgage?

You may receive preapproval in one business day or less. But depending on your mortgage lender and your eligibility, it could take a few days or even a week to receive it. And if you have an unusual financial situation, it can take even longer than that.

What to do if you’re denied for mortgage preapproval

If your mortgage preapproval is denied, there are a few steps you can take:

Ask the lender why you were denied: If it’s an issue you can remedy, like an error on your credit report, you can address that right away and seek preapproval again once it’s resolved.
Improve your credit score: If your credit score is too low or other financial roadblocks prevent you from being preapproved, you can work to improve those areas, too. Raise your credit score by making payments on time and paying down — or paying off — debt or lower your debt ratio by finding a way to increase your income.
Apply through a different lender: Lenders have different thresholds for qualification, so another lender may approve you, even with the same financials. If you’re an existing account holder with a bank or a member of a credit union, it might be more willing to work with you on a preapproval.

Frequently asked questions

Is there a cost associated with getting preapproved for a mortgage?

Yes, it’s possible to get denied a mortgage after a preapproval. This could happen if you take on additional debt between your preapproval and mortgage application. Other financial changes, such as a reduction of income or unexpected large purchases, might also result in a mortgage denial.
Can I get preapproved for a mortgage if I’m a first-time homebuyer?

Yes, you can get preapproved for a mortgage as a first-time homebuyer. In fact, it’s essential to do it before you start seriously looking for a home. Plus, you may have access to first-time homebuyer assistance loans and programs.
Can you be denied a mortgage after preapproval?

Yes, it’s possible to get denied a mortgage after a preapproval. This could happen if you take on additional debt between the time you’re preapproved and the time you apply for a mortgage. Other financial changes, such as a reduction of income or unexpected large purchases, might also result in a mortgage denial.

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Original Source At Yahoo Finance

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Original Source At Yahoo Finance