A mortgage pre-approval process helps you determine how much home you can afford and shows sellers that you’re a serious buyer. This step is best taken early on in the homebuying journey.
It involves a comprehensive review of your income, assets, and debts by a lender. Read on or call Steve Wilcox W/Primary Residential Mortgage, Inc. to know more about what to expect.
Credit Score
A mortgage preapproval process can give you a clear picture of how much you can afford and help you focus your home search. It can also help uncover any issues you might want to address before beginning the homebuying journey.
During the mortgage preapproval process, lenders typically pull your credit report to determine whether you qualify for a mortgage and what loan amount you might qualify for. Your credit score is a number that indicates to lenders how likely it is that you’ll repay your loan. The higher your credit score, the less risk you pose to lenders and the more likely you are to receive a lower interest rate.
However, it’s important to note that when you apply for a mortgage preapproval, your lender will do what’s called a hard inquiry on your credit report, which can have a slight impact on your credit scores. That’s because hard inquiries indicate that you are shopping around for a new line of debt. If you do too many hard inquiries in a short period, your credit score may drop temporarily. However, these impacts are generally short-lived and your credit score will rebound within a few months.
In addition to your credit score, lenders consider other factors when determining your mortgage eligibility, including your income and debt-to-income ratio (DTI). Your DTI is a calculation of your monthly debts divided by your monthly income. Lenders use this to ensure that you can comfortably afford the mortgage you’re applying for.
The lender will also want to see your financial documents, which include bank statements, pay stubs, and tax returns. Many lenders can pull these directly from your online banking accounts, but others will require you to bring them in person.
Before you apply for a mortgage, it’s a good idea to take steps to improve your credit score and prepare other necessary documents. This will help you get through the mortgage preapproval process as quickly and smoothly as possible. You should also avoid applying for any new lines of credit or transferring balances between credit cards in the months leading up to your application.
Debt-to-Income Ratio
Your debt-to-income ratio, or DTI, is another important factor in the mortgage pre-approval process. This figure is calculated by adding up all of your monthly minimum debt payments and dividing them by your gross (or pre-tax) income. Lenders use this number to determine whether or not you are financially stable enough to add a home loan to your existing debt obligations.
A high DTI can cause serious problems for your mortgage application, even if you have a high credit score and steady employment. In fact, according to NerdWallet, DTI is the most common reason for mortgage denials. To prevent this from happening, you need to understand how lenders calculate your DTI and what you can do to improve it.
DTI is calculated by dividing your total monthly recurring debt payments, including your mortgage, car payment, student loans, and credit card bills, by your gross (or pre-tax) monthly income. However, this figure doesn’t include any other regular monthly expenses, such as utilities, food, transportation costs, and health insurance.
The calculation is fairly simple: you just need to add up all of your recurring debt payments and divide them by your gross monthly income. For most borrowers, a DTI of 43% or lower is acceptable. However, some lenders may be willing to work with higher DTIs.
Having a high DTI can make it harder to qualify for a mortgage, but it’s not impossible. If you have a high DTI but have a strong credit score and consistent earnings, there are several ways to improve your ratio. For example, you can try to pay down your existing debts or find a lender that will accept a larger down payment.
DTI is an especially important factor if you’re planning on getting a government-insured mortgage, such as an FHA or VA loan. These types of loans typically have stricter DTI requirements than conventional mortgages. In addition, you may need to provide more documentation of your income and assets to qualify for a government-insured mortgage. As a result, you should start the mortgage pre-approval process early to ensure that you meet all of the requirements.
Down Payment
The amount you pay upfront to purchase a home can impact your mortgage pre-approval process. Lenders take into account a potential borrower’s down payment as they evaluate the overall financial picture, including their credit score, income, and debt. They also look at the type of property they’re interested in purchasing and the loan term, such as a 30- or 15-year mortgage.
A down payment consists of money the borrower puts toward a property’s purchase price, along with other costs associated with the transaction, such as closing fees and prepaid expenses. The lender will use the buyer’s down payment percentage to help determine their maximum loan amount and interest rate. Generally, the higher the down payment, the lower the total cost of the loan.
During the pre-approval process, lenders will review documents such as tax returns and paychecks to verify a borrower’s income and assets, such as cash in the bank or investment accounts and real estate holdings. They will also run a hard credit inquiry and pull the borrower’s FICO score, which is typically between 300 and 850. They may also look at other financial data, such as the amount of debt the borrower has and their debt-to-income ratio.
Once a potential borrower has been preapproved, the lender will issue a letter that details how much they can afford to borrow as well as their estimated monthly payments. The letter typically has an expiration date that varies by lender, which is why it’s important to shop around before choosing a mortgage. A buyer should compare the fee structures, loan terms, and customer service offered by each lender before making a decision.
A buyer’s mortgage pre-approval is not final until the borrower has found a property and made an offer. Once the lender has completed its due diligence, such as a home appraisal and a title search, they’ll then issue a commitment letter that seals the deal on the loan and allows the borrower to proceed with closing the home.
It’s possible to get preapproved for a home loan without having found a property, but this is not ideal. The process of getting a mortgage can be lengthy and complicated, and some circumstances could stand in the way of approval.
Closing Costs
Closing costs are fees charged by lenders or third parties at the time you close on a mortgage. They typically include attorney fees, underwriting, and home appraisal fees. They can also include title insurance and transfer taxes. Closing costs typically total between 2% and 5% of the loan amount. Closing costs vary by location and can be influenced by local taxes and fees.
These fees are charged to cover the cost of preparing your loan documents and verifying your information. These fees may be charged as a flat fee, or they may be based on a percentage of your loan size. For example, underwriting fees are typically 0.25% to 0.50% of your loan size. Other closing fees may include a survey fee, which goes to a company that surveys your property to confirm land ownership records, and a county recording fee of around $125. In some states, you will pay a transfer tax, which is a local government charge for transferring ownership of the property to you.
While you can’t avoid paying closing costs, you can try to minimize them. For instance, you can reduce your loan origination fees by shopping around and comparing rates. In addition, you can choose to purchase a co-op instead of a single-family home to reduce title insurance and transfer taxes. You can also negotiate with the seller to pay some of your closing costs, known as seller concessions.
You might be able to roll some of your closing costs into your mortgage, but this is only possible if you are buying a home and can afford the additional loan amount. Otherwise, you can expect to pay these fees out of pocket.
Getting pre-approved for a mortgage is an important first step in the home-buying process. The pre-approval process can help you determine how much loan you can afford and what your credit profile looks like to a lender. This will be crucial when you start the home-buying process and can save you money by avoiding overpaying for a home or accepting a higher interest rate. If you have questions about the mortgage preapproval process or your financial situation, contact a loan officer at a reputable lender for help.
