Buying a home is a big decision, and getting pre-approved for a mortgage can be an important step in the process. Pre-approval means that a lender has reviewed your financial information and is tentatively willing to lend you a certain amount of money to purchase a home. This not only gives you a better idea of what you can afford, but it can also make you a more attractive buyer to sellers. In this article, we’ll take you through some of the common steps of getting pre-approved for a mortgage.
Check Your Credit Score
Your credit score plays a big role in your ability to get approved for a mortgage. You want to aim for a credit score of at least 620, but the higher the better. Before you start the pre-approval process, check your credit score and make sure there are no errors on your credit report. If you find any errors, contact the credit bureau to have them corrected. If your score is on the lower end, you may want to spend several months working to elevate it.
Calculate Your Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is the amount of debt you have compared to your income. Lenders look at this ratio to determine how much of a mortgage payment you can afford. To calculate your DTI, add up all of your monthly debt payments (such as credit cards, car loans, and student loans) and divide that by your monthly gross income. Your DTI should ideally be below 36%.
Gather Your Financial Documents
To get pre-approved for a mortgage, you’ll need to provide your lender with a variety of financial documents, such as your W-2 forms, tax returns, pay stubs, and bank statements. Make sure you have all of these documents organized and ready to go before you start the pre-approval process.
Research Lenders
Not all lenders are created equal, so it’s important to do your research before choosing one. Look for a lender with a good reputation and competitive rates. You can also check with your bank or credit union to see if they offer pre-approval.
Get Pre-Approved
Once you’ve chosen a lender, it’s time to get pre-approved. You’ll need to fill out an application and provide the lender with all of the financial documents you’ve gathered. The lender will then review your application and let you know if you’re pre-approved for a mortgage and how much you’re approved for.
Shop for Homes
Now that you’re pre-approved for a mortgage, you can start shopping for homes. Keep in mind that your pre-approval amount is the maximum amount you can borrow, so make sure to factor in other expenses like property taxes and homeowner’s insurance when looking at homes.
Make an Offer
Once you’ve found a home you love, it’s time to make an offer. Your pre-approval letter could give you an advantage over other buyers who aren’t pre-approved. Sellers will see that you’re a serious buyer with financing already in place.
Get a Home Inspection
If your offer is accepted, it’s important to get a home inspection to make sure the home is in good condition. This will give you an idea of any repairs that may be needed and can also help you negotiate the price with the seller.
Finalize the Mortgage
After the home inspection is complete, you can finalize your mortgage. This involves submitting a loan application and providing any additional documentation that the lender requires. The lender will then review your application and, if everything checks out, you’ll be approved for a mortgage.
Close on the Home
Closing on a home involves signing a lot of paperwork, but it’s also the exciting final step in the process. You’ll need to make the down payment and cover any closing costs, and you’ll sign the mortgage and other documents to transfer ownership of the property to you. The closing process usually takes a few hours, and once it’s complete, you’ll receive the keys to your new home.
Maintain Your Credit Score
Just because you’ve been pre-approved for a mortgage and purchased a home doesn’t mean you should neglect your credit score. Your credit score is still important, and missing payments or racking up new debt can hurt your score and potentially lead to financial trouble down the line. Make sure to continue paying your bills on time and keeping your debt under control.
Refinance If Necessary
If interest rates drop or your financial situation improves, it may be a good idea to refinance your mortgage. Refinancing can help you save money on interest and potentially lower your monthly mortgage payments. Just make sure to do your research and ensure that refinancing makes financial sense for you.
Getting pre-approved for a mortgage is an essential step in the home-buying process. By checking your credit score, calculating your debt-to-income ratio, gathering your financial documents, and getting pre-approved, you’ll be in a strong position to make an offer on your dream home. Remember to do your research when choosing a lender, factor in additional expenses when shopping for homes, and continue to maintain your credit score even after you’ve purchased a home.
Resource Links
Consumer Financial Protection Bureau: Get a Prequalification or Preapproval Letter
CNBC: How to Shop for a Mortgage Without Hurting Your Credit