Mailbox: I need a mortgage pre-approval!

We love receiving emails for assistance! We'll share one from this week. (Used with permission)

Q) I am looking to buy a house soon. What recommendations can you give to prepare for requesting a mortgage pre-approval? - Jane

A)

Hi Jane,

When preparing to request a mortgage pre-approval, ( sometimes referred to as a pre-qualifying ) you can take several essential steps to increase your chances of success and make the process smoother. Here are some thoughts to consider:

1. Check your credit score: Lenders consider your credit score when evaluating your mortgage application. Please obtain a copy of your credit report ( AnnualCreditReport.com ) and ensure it's accurate. If there are any errors, work on resolving them. If your credit score is low ( < 620 ), take steps to improve it by paying bills on time and reducing debt. You can often obtain your score for free from your bank or creditor. Some other popular options include Credit Karma, Credit Sesame, and Mint.

2. Assess your finances: Look at your expenses, income, and overall financial situation. Calculate your debt-to-income ratio (DTI), an essential factor for lenders. Aim to keep your DTI below 36%. Some creditors will accept a ratio of up to 43% to qualify for a mortgage, but this could create limited opportunities for you to invest in your future, add unnecessary stress or distract you from critical goals such as retirement.

3. Down payment: Determine how much you can afford to put down on the house. Saving for a down payment demonstrates financial responsibility and lowers the loan-to-value ratio, making you a more attractive borrower. Although requirements differ, targeting a down payment of 10-20% of the home's value is advisable. Ideally, aiming for 20% or more is recommended since it allows you to avoid the additional cost associated with Private Mortgage Insurance (PMI). Generally, PMI costs range from 0.5% to 1% of the loan amount on an annually. That's money you could be keeping in your pocket.

4. Gather necessary documents: When applying for pre-approval, you must provide documentation such as identification, proof of income (pay stubs, W-2 forms, tax returns), bank statements, and details about your assets and liabilities. Collect these documents in advance to speed up the process.

5. Check the market: Using an online website such as Bankrate.com can assist you in your market research. You can input your zip code, downpayment amount, credit score, term length, and mortgage type to understand the current market rates and trends. This research will give you more knowledge before proceeding to the next steps.

6. Shop around for lenders: Research different lenders and compare their rates, fees, and mortgage programs. You can start with a bank you currently do business with. You can look for a smaller, local bank with an excellent customer service reputation. You can look at a large national bank. Look for reputable lenders with good customer reviews. Think about collaborating with a mortgage broker who can assist you in finding appropriate loan options. Being cautious is vital, as a broker's motivations may not align perfectly with yours. Securing a more advantageous loan is possible by directly interacting with lenders vs. a broker. During your meetings with potential mortgage brokers, request a thorough explanation of how they will assist you, inquire about their fees, the lenders they collaborate with, and their level of experience in the industry.

7. Get pre-approved: Submit your application to the lender of your choice. They'll evaluate your financial information, creditworthiness, and other factors to determine the maximum loan amount they're willing to lend you. Getting pre-approved provides a better understanding of your budget and strengthens your position as a buyer.

8. Avoid significant financial changes: During the pre-approval process and until closing on your home, it's crucial to maintain stability in your finances. Avoid taking on new debt, making significant purchases, or changing jobs, as these actions can impact your pre-approval and jeopardize your mortgage application.

9. Understand the terms: Review the terms and conditions of the mortgage pre-approval. Pay attention to the interest rate, loan type (fixed-rate or adjustable-rate), loan duration, and associated costs. Seek clarification on anything you don't understand.
   

So when should you get pre-approved? Should you wait until you've found your ideal house? Should you start the process today?

If you have gathered all of the data we outlined above, including your Credit Score, Debt to Income Ratio, and you have researched potential lenders you wish to contact, then you're very close. If you go out to look at homes before getting pre-qualified, go into it with the attitude that you're just getting an idea of what home prices are on the market. How much does a home fitting your needs cost if it is new construction? How much home can you get if it were an existing home? During this phase, it's critical for you to know what features are must-haves (wants vs. needs). Do not buy more home than you can afford or a larger home than you need.

If you attempt to make an offer on a home without being pre-qualified first, you won't be in the best position against other offers from pre-approved buyers. It's time to get pre-approved for a mortgage once you are serious about buying a house. We feel it's better to do this sooner than later. If there are any issues with your debts, credit score, or down payment, it's better to know that now. You'll be able to correct it before making an offer on a new house.

Following these suggestions will prepare you to request a mortgage pre-approval. Remember, pre-approval is not a guarantee of a loan but a practical step in the home-buying process that strengthens your position as a serious buyer.

Click below if you would like to be coached through the home buying process or to discuss your situation:

Click here to contact a Financial Coach