You have gone on a house hunt for your dream home; a sort of window shopping for a home that you would eventually buy. You find it, and approach the bank in order to get a mortgage loan, but they deny your request. Sometimes, they may approve a request, but they may finance a loan that is significantly less than the price of your perfect home. Your dreams of buying the home are shattered. However, the reason for your frustration is that you put the cart before the horse. You shopped for the house before you had any guarantee that you would get the finances to purchase it. This is why it is so important to get mortgage approval first before you start searching for your dream home. This way, you will always be ready to purchase the home you love.
What is mortgage loan pre-approval?
A pre-approval is a written statement from your mortgage lender stating that they will finance a mortgage loan of a certain amount if you follow certain guidelines. The loan amount that the lender offers to give you will depend on your credit history and your income. The pre-approval letter is usually valid for sixty to ninety days.
Why should you get a mortgage pre-approval?
There are quite a number of reasons why you should get a mortgage loan pre-approval. Some of them include:
The lender will tell you the amount of money that they are willing to lend you in their pre-approval letter. This will give you an idea of your budget, so that you can realistically search for a home that you can afford.
The letter will help you to prove to a seller or a real-estate agent that you are a very interested buyer, and that you are not just searching for homes without any intention of purchasing one. This will encourage a realtor to act fast so that they can get you a home.
A lot of sellers usually require buyers to submit a pre-approval letter with their bidding offer. This will help them when choosing a bidder, as they will only choose bidders who have a higher chance of purchasing the home.
A pre-approval letter can help you to stand out in a bidding war. If other people do not have a pre-approval letter, the statement from your lender will show the seller that you are a serious buyer.
How to get your mortgage pre-approved
Before approaching any lender, you should start by checking out your credit score. Ensure that there are no mistakes in your credit report. In case of any mistakes, correct them so that your credit report can accurately display your current financial situation. You can also work at decreasing your debt-to-income ratio. It is always better to have a debt-to-income ratio of less than 36%, as this will increase your chances of getting a mortgage pre-approval letter.
Approach a lender, and let them know of your willingness to purchase a home. The lender will ask you for information on your financial history. They will require your pay slips and information on sources of income including a second job, commissions, overtime, dividends and interests, social security payments, pension, retirement benefits, alimony, child support, and bonuses. They will also ask for tax returns, W-2 forms for the two previous years, and financial statements from your bank. In case you have a co-borrower, they will ask for their financial history as well. They will ask for your social security number, and the social security numbers of your co-borrowers. They will also ask for permission to pull out the credit report of you and your co-borrowers.
The lenders will analyze the information, and if they like what they see, they will pre-approve the loan and state that they will finance a particular amount if conditions such as appraisal of the home are met.