Buying a home can seem like an overwhelming and scary process, but it doesn’t have to be. By getting preapproved for a mortgage before looking at homes, you can cut through the fog.
What is Preapproval?
Preapproval simply means that you have been approved for a mortgage rate ahead of time. This process allows you to find out what types of mortgage, and how much of a mortgage loan, you would qualify for. This helps narrow down the homes you will want to look at.
How Long Does Preapproval Last?
Preapproval for a mortgage does not last forever and most expire 90 days after being offered. This means you’ll want to get preapproved when you are ready to purchase a new home, just as you start looking. You do not want to wait until you’ve found the home of your dreams to try and get preapproved only to find out it’s outside your purchasing power.
Preapproval vs. Prequalified
Prequalified may sound like preapproved, but they are very different. Generally, prequalification requires a lender to check your credit and briefly look into your finances before telling you what mortgage you will probably qualify for.
Preapproval on the other hand is much more finite. These are genuine offers of loans from lenders. To find out your preapproval rate, you will fill out a mortgage application and the lender will verify the information, as well as perform a credit check. If you’re approved, you will receive a preapproval letter.
Steps You Should Take Before Filling Out the Mortgage Application
- Check your credit score. Lenders tend to like to see scores of 740 or above.
- Check your credit history and make sure to look for any errors you might want to dispute.
- Determine your debt to income ratio, or DTI. This is the amount of your gross monthly income that is dedicated to paying debts. Generally, lenders like to see this amount, including the potential monthly mortgage payment, under 36% of your total gross monthly income.
- Gather your proof of income. This can be two years of either W2s, paystubs, or 1099s. For those of you who are self-employed, you can submit two years of income tax returns. Additionally, if your down payment is going to come from a gift, you’ll want to make sure you have a paper trail handy for the lender.
When applying for preapproval, make sure to talk to a few lenders before choosing who you would like to go with. Most homebuyers who shop around tend to save nearly $500 in interest in their first year of homeownership. Local lenders may be able to help approve an application that once had barriers, and some larger lenders might be able to get better rates. It helps to shop around before committing to ensure you are getting the best deal.