Anyone buying a home who is not in a position to pay cash will probably need to take out a home mortgage. Getting pre-approved for a mortgage can simplify the process when real estate agents approach sellers with offers to purchase. In situations where sellers receive multiple offers from real estate agents, a pre-approval can make an offer more competitive.
What Is Mortgage Pre-approval?
Pre-approval does not mean that the lender has approved a loan: Approval won’t happen until a purchase contract is in place.
The Mortgage Pre-approval Process
The first step in the mortgage pre-approval process is submitting the mortgage application. On the application, the applicant will answer questions about their finances.
Identification
Identity theft is a pervasive problem in the lending and credit industries today. The lender will need to make sure that someone else is not fraudulently applying for a mortgage in the applicant’s name. Applicants will typically have to provide the following information.
- Their social security number (which also allows the bank to check your credit history)
- Proof of identification (such as a passport or driver’s license)
Income
The lender will want reassurance that the home buyer has a steady source of income that will pay off the loan. The precise income requirement may vary, but in general, monthly income should be at least four times the expected mortgage payment. Generally, the lender will want to see W2 forms or other proof of income for mortgage pre-approval.
Homebuyers who are self-employed may have to take additional steps to verify their income. They may have to verify that they have been in business for at least two years. Income from the past two years can be used as a basis for the buyer’s projected income. For example, if a buyer made $56,000 one year and $40,000 the year before, their income would average out to $48,000 a year or $4,000 per month.
Assets
The lender will want to see bank statements, account statements for investment accounts, and other documentation for assets.
The buyer’s physical and non-physical assets are relevant to the pre-approval application because the buyer could liquidate them if, for instance, they were laid off or experienced a disruption in income for some other reason.
Employment History
The lender will verify that the buyer has a steady source of income. Ideally, this would be a job that the buyer has held for at least two years. If a buyer has changed jobs, the lender will look for evidence of stability. For example, a promotion to a supervisory position might count in the buyer’s favor, while a layoff or switch to a lower-paying job might put the buyer at a disadvantage.
Debts
Once the lender has checked the buyer’s credit, it will look at the buyer’s existing debt, such as other mortgages, car loans, student loan debt, and credit card debt. Credit card debt can be a red flag if it indicates that the buyer is spending more than they earn.
The lender calculates the debt-to-income (DTI) ratio, a measure of creditworthiness. According to the credit reporting agency Experian, a DTI under 43% is necessary for a qualified mortgage.
What’s Next After Applying for Loan Pre-approval?
Getting the Pre-approval Letter
The time it takes to get a pre-approval letter may vary depending on how long it takes the lender to verify the details and reach a decision. It typically takes a few days up to a week.
The mortgage pre-approval letter from the lender will include a statement of the loan amount, interest rate, type of loan (for example, fixed-rate or variable rate), and the expiration date of the letter.
What If the Buyer’s Financial Situation Changes?
After the buyer has obtained pre-approval, it is in the buyer’s best interest for their finances to be as stable as possible until the mortgage lender approves the loan.
If any of the details in the application change, the lender might no longer be willing to lend on the preapproved terms. For example, a drop in the buyer’s credit score, or a change in interest rates for adjustable-rate mortgages, might mean that the buyer no longer qualifies for the loan at the pre-approved rate.
Getting Help With the Home Loan Process
If your financial situation is complicated, or if you are uncertain about the pre-approval process, you don’t have to handle it alone. Cornerstone Capital Financial Services, LLC can help you find financing for your new home. We offer a range of financial products and services. Apply on our website or call us at 201-265-4545 for a consultation today.
