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Buying a home is one of the biggest decisions you’ll ever make — and being prepared ahead of time with a preapproval letter can make the process a lot smoother.
A mortgage preapproval letter gives you a leg up in the buying process by showing how serious you are about purchasing a home and how much you can borrow, especially now.
Lending standards for new home buyers are tougher than they’ve been in years due to the pandemic’s impact on employment and the economy, which makes it all the more important to get a mortgage preapproval and stay on top of it.
“People are going on furlough and losing their jobs, so it’s affecting the preapproval process. Extra overlays on top of traditional guidelines are happening more than ever now because of COVID-19,” says Chris Devin, branch manager at lender CrossCountry Mortgage in Norwell, Massachusetts.
So if you’re looking to buy a home, here’s how to boost your chances of getting preapproved for a mortgage that suits what you’re looking for.
What Is a Mortgage Preapproval?
Not getting preapproved before shopping for a home is a rookie mistake. With the tight housing inventory these days, most serious sellers expect a preapproval letter when you walk through the door, and certainly by the time you might make an offer.
A mortgage preapproval tells you (and your seller) the amount of money you can borrow from a lender to buy a home. The lender does a hard credit check and assesses the applicant’s income, assets, and debts to calculate your debt-to-income and loan-to-value ratios and determine whether you qualify for a mortgage — and for how much.
Figuring out the maximum amount you can borrow helps set your price range while looking at homes, and puts you in a much better position as a prospective home buyer, since it tells sellers you are backed by a lender to put up what it will take to close the deal.
“It’s all about leverage. You want to have success, and the way to have that is to see what you can afford and get preapproved,” says Susan Meitner, president and CEO of Centennial Lending Group, a full-service mortgage bank in Maple Glen, Pennsylvania.
Because the process involves a hard credit check, you may want to wait to get preapproved until you’re seriously ready to start shopping for a home. However, getting preapproved early on can also be a good way to spot potential issues and fix them before you’re far in the buying process.
Mortgage preapproval letters are normally valid for at least 60 to 90 days. But additional requirements and standards are becoming the new norm for mortgage lenders during the COVID-19 pandemic, so it’s a good idea to check in with your lender and make sure you’re still qualified. For example, U.S. Bank recently increased its minimum credit score to 680 for government loans and introduced a maximum debt-to-income ratio of 50%.
You’ve likely heard the terms “preapproval” and “prequalification” used interchangeably, but there’s a big difference between the two. A prequalification involves verbally sharing personal financial information with a lender, which then gives you an estimate on a mortgage and some preliminary information on applying for a loan. It’s a starting point to figure out how much you can spend on a home, but it carries no weight.
“Prequalification isn’t as much of a leg up,” Meitner says. “It’s only worth the information that was relayed to that loan officer.”
If you’re serious about buying a home, get preapproved for a mortgage before looking at homes to have a clear idea of what you can afford.
How To Get a Mortgage Preapproval in Four Steps
To issue a preapproval letter, lenders are looking for evidence that you’re capable of repaying a mortgage. Every lender is different, but in general you’ll need to provide bank account information, assets, debts, income and employment history, and other critical financial information. Here’s a detailed list of what you’ll need:
1. Check Your Credit Score
Make sure you have an idea of what your credit score is before going through the process. To get preapproved for a mortgage, you’ll need a good credit score. Your FICO score, which is what lenders will look at, is essentially a combined credit pull from the major credit bureaus.
Most lenders normally require a minimum FICO score of 620 or higher to qualify for a conventional mortgage, and a credit score of at least 580 for a Federal Housing Administration loan, although that may no longer hold true amid the pandemic.
Many lenders are now asking for higher credit scores to protect themselves against delinquencies, defaults, and forbearance requests brought on by the economic slowdown. JPMorgan Chase, for example, now requires a credit score of at least 700 and a 20% down payment for new mortgages.
When the lender pulls your credit for preapproval, it’s considered a hard inquiry. Too many hard inquiries can negatively affect your score, but a single hard inquiry is unlikely to play a significant role in whether you’re approved for a mortgage.
Something else to keep in mind: Credit scoring systems treat multiple credit checks related to mortgage preapproval as a single event, so it’s wise to compare rates from multiple lenders at the same time.
2. Provide Proof of Income and Assets
You’ll have to provide the lender with proof of all types of income, including W-2 wage statements from the past two years, as well as recent pay stubs (overtime, bonuses, and commissions), and other additional income (net rental income, dividends, child support, and alimony). You’ll also need to share your tax returns from the past two years.
Your assets make up your net worth, and let the lender know whether you have the funds for a down payment and closing costs. As part of the preapproval process, you’ll need to share recent bank, investment, and retirement account statements, as well as cash reserves.
3. Get Employment Verification
Proving you have a steady stream of income is essential for preapproval, particularly now with unemployment still relatively high as a result of COVID-19’s effect on the labor market. The unemployment rate is higher than ever, and banks have become more concerned with risk.
Warren Goldberg, president and founder of Mortgage Wealth Advisors in Plainview, New York, says many lenders may request pay stubs and check in with employers right up to the day of closing. “Banks are concerned that borrowers’ income and employment might be affected in between the process right now,” Goldberg says.
4. Gather Other Personal Documentation
Lastly, the lender will ask for a copy of your driver’s license, Social Security number, and a signature to pull the credit report. If you already own a home, you’ll also need to share a copy of your property tax bill. Business owners or self-employed individuals will need to show two years’ worth of profit and loss statements. In general, be prepared to provide any last-minute information to the lender to move forward with securing a mortgage loan.
Three Questions to Ask During the Preapproval Process
Before buying a home, it’s important to understand home-buying requirements so you can find the right lender for you and get preapproved.
From mortgage lenders’ credit score requirements to debt-to-income ratios, the majority of Americans don’t understand what it takes to qualify for a mortgage, according to Fannie Mae’s 2019 Consumer Mortgage Understanding Study.
But you’ll find no shortage of banks, credit unions, or online lenders willing to take your mortgage application, which is why it’s important to do your research.
Meitner says while mortgage rates should always be taken into account when picking a lender, rates are hovering near record lows as the economy reacts to the effects of the pandemic. Instead you should focus your attention on finding a mortgage lender that not only offers a competitive mortgage rate, but also understands your financial goals, she says.
“People want the lowest rates, but all the rates are great right now. The relationship you establish with your lender is just as important,” Meitner says. “Your lender should be the one you have for life.”
Getting preapproved doesn’t make you obligated to borrow from a specific lender. Experts recommend speaking to several lenders to find the best deal before committing to one, but getting preapproved by more than one lender is usually unnecessary and could hurt your credit score. Here are three questions you should always ask a lender or mortgage broker during a consultation, according to Devin.
1. Do you work with multiple banks and investors?
Choosing the right mortgage broker or lender can save you money, time, and frustration. If you’re working with a mortgage broker, you should ask whether they work with multiple lenders to ensure you’re getting the best possible rate and deal. If you’re working directly with a lender, ask instead what type of home loans they offer and which one is best for you.
2. Do you have any extra overlays on top of traditional guidelines?
Mortgage lenders are tightening standards amid the COVID-19 pandemic, so double check that you meet the more stringent qualifications to buy a home at this time. Even after you’re preapproved, check in with your lender periodically to verify your preapproval status up until closing.
3. Do you offer multiple first-time home buyer programs?
Most lenders offer first-time home buyer programs, but it’s good to make sure since they can be either loan programs or financial assistance programs. Having multiple options to choose from can work to your advantage when buying a home for the first time. You may qualify as a first-time home buyer even if you’ve previously owned a home, so make sure to ask this question.
Why Mortgage Preapproval Matters
Sellers are unlikely to consider any offers you make without a preapproval letter, especially in a competitive housing market. Getting preapproved is the first step of the home-buying process and eliminates any potential hurdles before you fall in love with a home. It can easily turn into an emotional process, and a mortgage preapproval helps separate logic from emotion and informs how much you can afford to spend on a home.
“What I find is that buyers go looking for houses and ultimately find a house before they’re preapproved,” Goldberg says. “Getting a true and accurate preapproval before they start should be their first step because everything after that could come crashing down without that foundation.”
A preapproval letter can also help identify any financial problems early on that prevent you from getting a mortgage and gives you time to address them. Stay in close contact with your lender or mortgage broker throughout the entire process to make sure you still meet lending requirements when it’s time to close on a house.
Preapproval Doesn’t Guarantee Financing
Getting preapproved isn’t the same thing as applying for a loan. A preapproval letter says a lender has seen enough to feel reasonably confident lending a specific amount of money to you — not that it will actually grant you a mortgage. You’ll still need to follow through with full loan underwriting and processing, in which everything represented to the lender at the outset will be confirmed throughout and up to the closing process.
Preapproval mostly gives you an idea of what kind of mortgage loan you’ll likely qualify for and is conditional on your current financial and employment situation. It also shows sellers how serious you are about buying a home before making a formal offer.
“Preapproval isn’t guaranteed,” says Larry Sprung, founder of Mitlin Financial in Hauppauge, New York, “but it’s a good tool to show the seller that you’re serious and have gone through some due diligence.”