The first step to buying your dream house isn’t looking for a house. Your home buying journey starts with handling your funds and mortgage payments. This includes the pre-approval process you have to go through. If you want to learn more about these crucial requirements, our experts are here to explain everything you need to know.
What is a Mortgage Pre-approval?
Before being lent the money, you’ll have to be pre-approved first. Although the money is not with you yet, your lender has already qualified your application according to the information you’ve stated (i.e., credit history, personal details, property tax details, etc.).
You will have a clearer grasp of the term or duration, mortgage interest rate, and the initial amount they will give to you. This will help you narrow down your options during house hunting to which ones you can afford.
Requirements to Prepare
Like any other legal process, being pre-approved on a mortgage loan will need requirements and documents from your end.
The most basic ones that lenders will surely need are:
Let’s briefly break them down for your reference:
Proof of Income and Assets
This shows your mortgage lenders how much you earn and pay them back with your income. You will need to present the following documents:
For your assets, you’ll need to show your bank accounts and investment statements. Here’s why:
Pass the Credit Check
Mortgage lenders will also perform a background check on your credit score to see how you handle your monthly payments, credits card bills, and other loans (i.e., car loans, student loans, other debts).
This will give them insight if you’ll also pay them back properly after they lend money to you.
For conventional mortgage options, several lenders usually consider a score of 620 or above as high. Some go for 720 or higher. Bad credit scores don’t disqualify you immediately from the mortgage pre-qualification process. You’ll most likely have a larger down payment, the lower maximum amount allowed, and/or higher interest rates.
Proof of Employment
Mortgage lenders want to know if you have stable employment . Your stability would be their security that you’re capable of paying them back.
If you’re self-employed, you’ll need to show the necessary documents regarding your business. This depends on different lenders, but the most basic ones will be your business’ financial information, product/service, tax return statements, and the financial activities and performance of the business.
Some lenders require other supporting documents (i.e., personal information, other statements, valid I.D., signatures, etc.)
It’s best to prepare all of your government documents so you easily have all you need once they ask for them. If you have a co-borrower, prepare theirs too.
Pre-Qualified vs. Pre-Approval
These terms are often used interchangeably because they more or less mean the same thing – they perform checks on your financial status.
Both are sufficient evidence that you qualify for a mortgage, but the difference lies in how thorough the mortgage approval checking was.
This part of the mortgage application won’t affect your credit scores. It will only be applied once you’re officially approved.
Important Reminders, Tips, and Factors to Consider
Here are some mortgage basics to learn before you dip your toes in the real estate mortgage process.
There's More to the Purchase Price
A common mistake we often see is that people don’t realize how much more expensive the overall costs are on top of the loan amount.
There are closing costs, an interest rate that varies, mortgage rate, down payment, and so on. You need to allot allowances in your home buying budget for all these other expenses. Plus, the fee for your mortgage broker if you have one.
Passing this test proves that even as interest rates rise, you’ll still be able to pay your mortgage amount. It would be best if you had enough to cover for your current interest rate plus 2%.
Mortgage Broker or Mortgage Specialist
If you’re anxious, hesitant, or confused, you can consult trusted brokers to help. Though they have additional fees, you’re assured that you’re doing the right steps.
When to Get Pre-Approved for a Mortgage
It’s best to get a pre-approved mortgage before you buy the house. Make sure it’s enough to gauge that you’re not spending beyond your means, and it’s also not too far back wherein the interest rate is already inaccurate.
As exemplified in this guide, going through a mortgage pre-approval is quite simple and straightforward if you accomplish all the requirements involved on time. Our professionals hope that this guide and our tips were able to help you with your home buying process.