How To Get Preapproved For A Mortgage

So you’ve grown fed up with renting your residence and you’re ready to move into a home that’s truly yours.

Home-buying is no simple process; there a lot of pieces to successfully purchasing a home.

Among the most important of these pieces is the mortgage. Unless you’re extremely wealthy, you won’t be buying your home without getting a mortgage first.

However, even the process of getting a mortgage is no simple feat. There are many stages of the mortgage process, but one of the most important is preapproval.

First, Preapproval Vs. Prequalification

Although these terms are very similar, they are distinct parts of the mortgage process.

Prequalification

Prequalification tends to be the first step in getting a mortgage. Well, after creating a budget, of course.

It involves supplying lenders with information regarding your overall finances, including details on your income, expenses, assets, and debts.

The lender then uses this information to make a preliminary estimate of how much you can borrow.

Due to its preliminary nature, the prequalification process isn’t quite as formal as the preapproval process; prequalification can be done completely online or over the phone, and you usually get your results in half a week at worst.

In addition, the amount they give you will be very rough as you voluntarily supply all the information. There’s no hard-credit checks or deep dives into your finances.

Rather than serve as a formal tool to grasp how much mortgage you can afford, this stage is more exploratory; you can discuss borrowing options with your lender and get some recommendations.

All in all, prequalification serves as a measure of your risk to the lender and your ability to borrow.

Preapproval

Preapproval is where things start to formalize.

Whereas prequalification is more exploratory, preapproval is a more concrete “yes” on your mortgage and sets the whole mortgage process in motion.

All the formal stuff that prequalification skips appears at this stage.

At this point, you’ll have a much more accurate picture of your mortgage amount and your interest rate, which they may even let you lock in.

Now, preapproval doesn’t completely solidify your loan terms; instead, you’re given a conditional commitment for a certain amount of money, allowing you to shop around for homes within your price range.

As long as your financial big picture doesn’t change much throughout the home buying process, your preapproval offer shouldn’t differ all that much from your final mortgage offer.

What Do You Need Before The Preapproval Process?

Each step of the home buying process, such as getting a mortgage, is a process in and of itself. And if you break it down even further, preapproval is also an entire process within the mortgage process.

An optional first step to getting a preapproval is to get prequalified, but you can get preapproved without it if you want to speed up the process.

Anyways,

Since preapproval is much more formalized, you’ll need to gather a lot of stuff and maximize your financial health before you go and get preapproved.

First, Assemble Your Information

Since preapproval offers are much more formal, you’ll have to assemble a variety of financial information.

First of all, get your personal information together. This includes your Social Security number for credit checks and a valid form of ID like a driver’s license or passport.

Then, gather pay stubs, Form W2’s, and tax returns from at least the past 2 years for proof of income. Make sure to include other sources of income (dividends, interest earnings, side hustles, etc.); lenders are putting a lot of money on the line, so you need every last income source available to reassure them so you can maximize your potential preapproval offer.

On top of that, your lender will want information about your current assets, as having assets provides additional reassurance that you’ll have the means to pay a mortgage in some way.

Gather banks statements and documentation on your investments to provide you asset information to your lender.

Clean Up Your Credit

Like we said earlier, you’ll want to maximize your financial health (or at least it’s appearance). A big part of this is cleaning your credit history and raising your score, as lenders perform a credit check.

Cleaning up your history will boost your credit score, which in turn will qualify you for higher mortgage amounts and lower interest rates.

Fill Out An Application

Most of the time (although not always), you need to fill out an application to get preapproved for a mortgage.

This step is more of a formality if you were prequalified at the same lender that you’re applying to be preapproved with, but you have to do it so they can run the necessary checks and collect the information they need.

Many preapproval lenders charge an application fee, so make sure to work some room into your budget for that.

The Steps Towards Mortgage Approval

1.) Budgeting

Before you even think about buying a house, you’ll obviously need to do some budgeting.

Take a look at your current finances and your home buying goals. See what kind of monthly payment you can afford, but don’t stop there because you’ll have tons of other expenses as a homeowner.

When you’ve figured out your budget, you can get out there and look for a mortgage.

2.) Prequalification

If you want to start building a relationship with a lender and get an idea of what size of mortgage you might get, go the prequalification route.

It doesn’t take very long and it can be immensely helpful when you’re narrowing down your housing options.

Like we said earlier, this step is optional. Skip ahead to the next step if you don’t want to get prequalified.

3.) Gathering Your Documents

Now that you’re on the road to preapproval, it’s time to gather your documents like we covered earlier.

Same thing with your credit history; grab a copy of your credit report and dispute any errors. In addition, pay down some of your debts. We’ll talk about that later, though.

4.) Preapproval

When you’re ready to get some mortgage preapprovals, fill out a preapproval application at your chosen lenders and pay the fee if any of them have one.

Preapproval takes a little longer than prequalification, but not by much. You should have your results in about half a week or less.

5.) House Shopping

With some preapproved offers, you have a better idea of what you can afford.

Now it’s time for the fun part: house shopping.

The lender is mostly out of the picture for this step. They don’t come back into play until you’ve chosen your home and are ready to formally apply.

6.) Mortgage Application And Processing

Once you’ve settled on a home and agreed on a price with the seller, it’s time to officially apply for a mortgage at the lender offering the best terms.

Most lenders use a fairly straightforward from called the Uniform Residential Loan Application. On this form, you’ll give them some details about the home you’re buying. They’ll also ask for some more personal information from you.

After you’ve submitted your formal mortgage application, the lender has to do a lot of work regardless of how prequalified or preapproved you are. Details may vary slightly from lender to lender, but the general process remains the same.

Someone known as the loan processor will collect all documentation from you, including your application. From there, they’ll start verifying all your income, debts, and other financial information.

In addition, they may collect additional information on your chosen home by ordering an appraisal of the property.

Once they’ve gathered everything needed to make a lending decision, they’ll pass off the information to the underwriter.

7.) Mortgage Underwriting and Approval

The underwriter (or underwriting team if there’re multiple underwriters) is essentially the one who decides the fate of your borrowing efforts. They examine all documentation to ensure it complies with lending standards and regulations.

In addition, they’ll double check you and your property to make sure they also meet lending criteria.

Now, there are 3 main things an underwriter looks for when making a loan decision:

1. Capacity – Can you pay both your loan AND your other debts? Income, assets, and debt will give them a good idea of your ability to do so.
2. Credit – Have you demonstrated the ability to be responsible with your debts? Your credit score and history tells all here.
3. Collateral – Is the house valuable enough to be collateral for your mortgage? The underwriter looks at the home appraisal report to see if the house could be sufficient to cover the mortgage.

If they find that some criteria isn’t met, they have the authority to reject your loan.

However, they won’t do this all the time. Sometimes they’ll extend you a conditional approval. This just means they need some explanation behind certain transactions that could affect your ability to pay the mortgage.

In addition, small issues usually aren’t a problem at all if the borrower can take care of them quickly. Only major problems will lead to outright rejection in most cases.

If your loan makes it through the underwriting process, congrats! The underwriter will clear you for the mortgage and your loan will be funded.

They’ll send all documentation to the title company for closing purposes.

From there, you just have to sign a ton of paperwork and pay some closing costs, then you’ll be ready to move into your new home.

Some Notes About The Mortgage Process

Mortgage lenders put hundreds of thousands on the line every time they hand out a mortgage. That’s precisely why they require so much information and processing time.

However, just because you clean up your credit and hand them every last piece of financial information you have, doesn’t mean you can be financially careless upon preapproval.

See, lenders hate it when you take on new debt for the same reason that they make you submit so much information. More debt means less of your money is your’s; therefore, you’ll have less financial cushion to fall back on.

But isn’t that true for all purchases? Doesn’t more debt make anything more difficult to buy?

Yes.

The difference here is purely magnitude. Houses are massive purchases and thus massive risk for mortgage lenders, so they want you to avoid any new debt in order to have as much spare cash as possible.

So what does this mean for you?

Well, if you take on new debt during the mortgage process, you could actually have offers modified or even rescinded completely.

Lenders use the debt-to-income ratio to determine if your debt levels are low enough relative to your income to reliably pay a mortgage each month.

Once you’ve bought your home, the expenses don’t stop with mortgage principal and interest. You’ll have to budget for a lot of other things, like

• Closing costs
• Property taxes
• Repairs
• Upkeep
• Lawn care
• Homeowners association fees

So it’s important to give yourself a lot of breathing room when you make your housing budget.

Go Get You Dream Home

Sure, home buying can be an arduous affair that takes weeks or even months.

Not to mention the exorbitant amount of money involved.

Luckily, home buying is split up into multiple steps that require progressively more information.

If you’re in the market for a new home, don’t wait around: gather up your materials and start applying for preapproval at a variety of lenders while you shop for homes.

Following through on your home selection will be much easier if you’ve lined up several offers beforehand, and any headaches you can reduce while buying a home are definitely worth eliminating.

Speaking of home buying being an arduous affair, are you a first-time homebuyer? There are a lot of time and money pitfalls to avoid when shopping for your first home. We’ve compiled a bunch of them here, so make sure to give that a read!