In the world of home buying, imagine a mortgage pre-qualification as a learning license, while a pre-approval letter is a driver’s license. A pre-qualification letter can lead you on the road to homeownership, but that doesn’t prove that you can go far. With a pre-approval letter, you are on the fast track.
Pre-qualification or pre-mortgage approval?
Prequalification is a good first step if you are not sure if you want to buy a house financially. A mortgage pre-qualification is usually based on an informal assessment of your finances. It informs the lender of your loans, debts, gains, and assets, and the lender estimates if you may qualify for a mortgage and how much you can borrow.
With a previous mortgage approval, a lender takes out your credit report and checks the documents to verify your income, assets, and debts. If you are sure of your credit and your financial availability to buy a home and want to start shopping, you can skip the pre-qualification stage and go directly to pre-approval.
Steps to Obtain a Mortgage Pre-Approval
Get your free credit score. Find out where you are before contacting a lender. A credit rating of at least 620 is recommended, and a higher credit rating qualifies you for better prices. Generally, most borrowers with a credit score of 740 or higher can benefit from the best mortgage rates.
Check your credit rating. Ask for copies of your credit reports and deny any errors. When you find criminal accounts, work with creditors to resolve the issues before submitting them.
Calculate your debt-to-income ratio. Your debt-to-income ratio (DTI) is the percentage of your gross monthly income used to pay off your debts, including credit cards, student loans, and car loans. Lenders prefer borrowers with a DTI of 36% or less, including the mortgage, although this may be higher in some cases.
Collect income, financial accounts, and personal information. This includes social security numbers, current addresses, and employment information for you and your co-borrower if you have one. You will also need bank and investment account information and proof of income. During the pre-approval process, you will likely need to submit your W-2, 1099 tax form if you have additional sources of income and pay stubs. Two years of continuous employment are preferable, but there are exceptions. Independent candidates must file income tax returns for two years. If your deposit came from a gift or an asset sale, you will need a paper trail to prove it.
Contact more than one lender. It is possible for a lender to simplify your online pre-approval request, while a local lender can work with you to remove barriers to your approval. If you contact more than one lender, you can find the right financial partner for your situation and save money. Comparing Lenders for a Medium-Sized Mortgage Could Save an Average of $430 in Interest in the First Year, or a total of $9,200 on the 30-Year Mortgage, According to home Buyer Report Report 2019. And generally, the prior approval of multiple lenders to purchase interest rates should not hurt your credit rating. FICO, one of the largest rating companies in the United States recommends that these requests be limited to a limited period of 30 days.