Starting the home mortgage pre-approval process can be confusing at times to many buyers.
As a licensed Mortgage Broker and REALTOR®, I have worked with many buyers who feel overwhelmed by the process and need professional guidance.
In this guide, I will walk you step-by-step on how to get preapproved for a home loan.
Mortgage Pre-Approval Process
Step 1: Find a Mortgage Loan Officer
In order to start the pre-approval process, you need to find a lender who will help you with your mortgage pre-approval.
There are a few ways to choose a great lender. The first way, and probably the best way, is by referral.
Referrals
(1) Realtors
If you are working with a REALTOR®, your real estate agent is a great resource for lender referrals.
A real estate agent works with many lenders and will be able to recommend a lender who can provide competitive rates and great service.
Realtors also know how to match their clients with lenders based on personality and compatibility.
For example, if you are someone who appreciates a lot of detail and wants to be educated throughout the process, your realtor can recommend a lender who fulfills these needs.
(2) Your circle
Another great referral source are family, friends and co-workers. We all know people who have purchased or refinanced a home, ask those people who they used for financing.
Be sure to ask them questions surrounding their experience to ensure it feels like this could be someone you would want to work with as well.Â
If you get more than one name, be sure to contact each one and see who you feel most connected with. Remember, this is the individual that you will be working with throughout the financing process.
Make sure that they communicate with you in the way that you need and prefer. The way that they answer your questions is important because you want to ensure you understand the information they are providing.
A mortgage loan is a big commitment and you want to select someone that helps you fully understand the process.
Banking Relationship
The second way is to go to the bank or credit union that you currently do business with.
If you have an establish relationship with a bank or credit union, it is certainly easy to go into the branch and inquire about their pre-approval process.
There is one thing I would like to make you aware of. While credit unions can have very competitive rates, your local banks may not.
A bank typically only offers their own products and they may have a lot of overhead that gets built into your rate. Therefore, bank rates may or may not be the most competitive rate.
Therefore, my suggestion is to be sure to your banks rate and feels against other mortgage companies to ensure you are getting a competitive rate.
Another thing to note, is that many listing agents do not prefer to work with banks because of how long they can take to close.
So, be sure to talk to people and see if your particular bank has a good reputation for rates, service, and closing the transaction on time.
Online Research
A third way is to to do your own research. Go online and research different mortgage companies, banks, credit unions.
Be sure to research specific mortgage loan officers that you find a long the way. Check reviews and see what other people are saying about working with that company and/or that loan officer.Â
Again, it is a good idea to shop around and see which lender offers you the best deal AND best service.
I welcome you to browse our extensive directory of mortgage lenders to help you find a professional to begin the pre-approval process with.
Note: It is best to shop within the same two weeks to avoid having multiple inquiries on your credit report. If you shop within the same time period, the credit bureaus will most likely consider all these inquiries as one inquiry since it is evident that you are shopping lenders/rates.
Step 2: Apply for a Pre-Approval
Once you decide on who/whom you want to apply with, it is time to submit an application.
A loan officer will either have you complete an online application or take your application manually over the phone or in person.
The application will ask your for your personal identification information, employment and income information, asset details, any properties you may currently own, and any other pertinent information.
Once the application is complete, the lender will ask you for any necessary documentation they need to perform the credit and financial analysis.
Some examples of documentation they may requests are paystubs, W2s, tax returns, bank or investment statements, employer contacts, etc.
This documentation is important because it allows the loan officer to verify the information you provided in your application.
Step 3: Mortgage Loan Officer Review
Once the loan officer has your completed information and supporting documentation, the lender will pull your credit report and review all of the information provided.
In general, the loan officer is reviewing the following information:
(1) Your identity. You are typically asked to provide a government-issued ID and social security card.
Note: You do not need to be a citizen or permanent resident to qualify for a mortgage loan. If you are not a citizen or permanent resident, be sure to discuss this with your lender to ensure they have a loan program that fits your needs.
(2) Your employment history. Typically a lender requires a minimum of a 2-year work history.
There are exceptions of course, such as, if you were a full-time student and can provide documentation of this as required by the lender.
There are also other exceptions that a lender can discuss with you but for general purposes, a 2-year work history is what is required.
In addition to the time of employment, the loan officer is reviewing what type of employment you have.
For instance, if you are a W2 employee for a company and whether or not you are hourly or salary.
If you are self-employed, the lender will also make sure they have all of the information needed to satisfy the self-employment requirements which are different than a W2 employee.
If there are any gaps in employment, the loan officer will ask you about those gaps to understand why they exists.
It does not necessarily preclude you from getting pre-approved but they will seek to understand the reasons for them.
(3) Your assets. The mortgage loan officer will look at your bank and investment statements to confirm that you have enough “cash-to-close”.
This cash-to-close is the amount you will need to bring to the closing table to cover both your down payment and closing costs.
If you do not have enough cash to close, the loan officer will inquire on how you plan to pay for the down payment and closing costs.
If you do not have sufficient funds to close, you can talk to your lender about getting a gift from a family member or employer or potentially qualifying for a down payment grant or assistance program.
(4) Your credit report. During the pre-approval process, the lender will pull your credit report. This may be a soft pull or a hard pull.
Your credit report is pulled from Experian, Equifax, and Transunion. From these reports, the lender will use your middle score and all of your debts to continue to process and review your application.
The reason your credit report and credit score are so important is because:
(1) Your rate and loan program are determined by using your credit score. The higher the credit score, the more loan programs available to you and the better your rate will be. The lower the credit score, the less loan programs are available (if any).
(2) Your current debts on your credit report are used to calculate your debt-to-income ratio. The debt-to-income ratio is one of the two qualifying ratios used in the loan approval process.
(5) Your debts and liabilities. In addition to your assets, a loan officer must review your debt obligations. Now that the lender has your credit report, the lender will import the report to the lenders system and used the information in the debt-to-income calculation.
When it comes to your debt, the lender is using the minimum monthly payment required for that debt not the total balance.
For example, let’s say you have a credit card with a $5,000 current balance and it has a minimum payment of $150. The $150 minimum payment is pulled into the debt-to-income (DTI) ratio – not the $5,000.
They will pull all of your monthly payments and use them to calculate your DTI. Your DTI must remain under a certain percentage to be eligible for a mortgage loan. The DTI maximum percentage will vary by loan program.
(6) Your current real estate owned properties. On the application, you will provide information on any real estate properties you currently own. These can be your primary residence or investment properties.
The reason these properties are reviewed is to ensure that all the income and liabilities for these properties are incorporated into your application accordingly.
For example, if you own a property, the mortgage, insurance, property taxes, and HOA fees are incorporated into your debt-to-income ratio.
Similarly, if the property you own is an investment property, the net income from this property can be added to your application giving you more purchasing power.
This will be discussed in a different article but wanted to make sure that you are aware that the definition of a first-time homebuyer is a borrower who has not owned a principal/primary residence within the past three years.
Once the lender receives your credit reports/scores, reviews all your documentation and runs all the numbers (including debt-to-income ratios), you will learn whether or not you qualify for a pre-approval.
Once pre-approved, the lender will issue a pre-approval letter typically with a specific amount for which you have been approved up to. Also, at this time, you will have a better idea of the interest rate to expect.
However, this rate is subject to change up until the rate becomes fixed and/or the loan closes.
This is also a great opportunity to understand what your monthly payment might be by using that day’s interest rate and a specific purchase price.