Home buyers should always have got a mortgage pre-approval at the top of their to-do list. In this blog, I’ll walk you through the important details you need to know about this crucial step.
What is a mortgage pre-approval?
In a nutshell, a mortgage pre-approval is an assessment of your borrowing capacity made by a lender. Financial credentials like your credit score, income-to-debt ratio, and employment records will be examined. After the assessment, you get a written statement from the lender indicating how much you can borrow. This document is typically valid for 60 to 90 days.
What documents are required for a mortgage pre-approval?
When applying for a mortgage pre-approval, the following are required, along with personal identification:
- Two years of W-2 forms
- Two most recent federal and state tax returns
- Two most recent pay stubs showing your year-to-date income
- Asset account statements covering your Certificates of Deposit, savings, checking, investments, and retirement accounts
- Records of other properties that you own
- Records showing where you lived for the past two years and, if applicable,your landlord’s contact information
Why you should get a mortgage pre-approval?
- You will have an accurate idea of your purchasing power
- A pre-approval will help you get your finances in order
- Getting pre-approved helps you strike quickly in a competitive market
With knowledge of how much you can spend on a home purchase, a mortgage pre-approval helps you narrow down your search. This way, you avoid wasting time on unrealistic targets.
A mortgage pre-approval gives you a reality check on your overall financial situation. By allowing a lender to take a thorough look into your records, you can seek advice on how to prepare for your impending home buy. They can even identify any issues and their root causes so you can fix them.
Your pre-approval letter can come in handy when you want to buy a hotly contested property. Because you have an official document proving you can afford the purchase, it becomes easier to convince a homeowner to sell to you.
Tips for getting a mortgage pre-approval
- Before applying for pre-approval, first improve your credit score by settling your debts, paying off your credit card balances, and making a habit of paying bills on time. Aim for a credit score of around 650-700, which is considered fair. Remember though that you can improve your home buying opportunities with an excellent rating of 750 or higher.
- Review your credit score and report errors ahead of time. Request a free credit report from AnnualCreditReport.com. If you find any discrepancies, report these to the credit bureau concerned.
- Be sure to fully understand the mortgage pre-approval and application processes. Ask your lender for clarifications that you might need.
- Remember: You don’t have to spend the full amount indicated in your approval letter. If you are satisfied with a property that costs less than the pre-approval amount, request for an adjusted pre-approval letter from the lender. This way, you can save money for utilities, taxes, and eventual mortgage payments. You can also prevent a seller from negotiating a higher sale price based on your borrowing capacity.
- Be wary of the timing of your pre-approval request. Remember that your preapproval letter is only valid for up to 90 days. Be sure that you’re ready to begin your search before you request a pre-approval. And when you receive the letter, complete a strong offer before it expires.
Learn more about how to buy a home from me, Northern Colorado real estate expert Matthew Curry. Talk to me today at (970) 889-0307 or email your inquiries to matt(at)welcometonoco(dotted)com.