When you think about starting the home buying process, you might picture yourself touring homes, admiring hardwood floors, and puzzling over odd paint choices. But the reality is that buying a home should actually start with a visit to a lender so you can get pre-approved for a mortgage. Once you have a letter in hand stating that you’ve been pre-approved, you should start looking at houses within your budget.
The reason for this is that sellers tend to take you more seriously when you have proof that you can afford the house they’re selling. As a result, you might have a better shot at not only getting the house you have your eye on but also negotiating down to a price you prefer. In a competitive housing market, mortgage pre-approval can make a big difference for you.
As you start the pre-approval process, note that it’s different from the pre-qualifying process. It’s much easier to get pre-qualified, as you can give a summary of your income and assets to a lender, who will then give you an estimate of what you can afford. The lender doesn’t pull your credit report or verify any information, though, so the pre-qualification letter doesn’t hold much weight in the buying process.
By contrast, pre-approval is harder to get, as you must provide documentation of your income, assets, credit, and more. So, what is needed for mortgage pre-approval? Here’s a look at what you should expect from this process.
One of the most important things to know about pre-approval for a mortgage is that the lender will pull your credit. This means you can expect to see at least one hard inquiry on your credit report. But if you’re thinking of shopping around with different lenders, don’t worry about getting several inquiries on your report. As long as all the credit pulls take place within a few weeks of each other, they’ll count as one inquiry rather than several.
So, what is needed for mortgage pre-approval when it comes to your credit score? At a minimum, most lenders expect you to have a credit score of 620 or higher. But it all depends on what kind of home loan you’re hoping to get. A 620 is typically the minimum score you can have for a conventional loan, but your interest rate will be high. If you want the lowest rates, your score should be closer to 760.
If your score is lower than that, you can likely still get pre-approved for a mortgage. You’ll just have to pick the right home loan for your needs, as some allow lower credit scores. For example, you can often qualify for an FHA mortgage with a score of 580 or even 500 if you’re willing to increase your down payment.
If you qualify for a VA loan or a USDA loan, note that these programs don’t have minimum credit scores. However, most lenders set their own minimum scores that you must have in order to qualify, and they’re usually somewhere between 580 and 640. So as long as your credit score is higher than this, you have a chance of getting pre-approved for a mortgage loan.
Another document you’ll need to get a pre-approval letter is verification of employment. Lenders want to see that you have regular income from a job you’ve had for a while. For this reason, you’ll need to provide your employer’s name and contact information so the lender can call or write to verify employment.
If you haven’t worked at your current job for more than two years, the lender might want to contact your previous employer to ask how long you worked there and what your title was. If you’re self-employed, the lender may take a little more effort to verify employment for mortgage pre-approval. But as long as you have at least two years’ worth of tax returns that show you’ve made a steady income, the lender should be able to verify employment.
Having a job is important for lenders to see, but they also want to make sure you make enough money at that job for you to afford your mortgage. So at the same time, lenders are verifying employment — expect them to ask about your income.
If you’re wondering what is needed for mortgage pre-approval when you’re self-employed, be prepared to send in two years of tax returns to prove your income. If you’re an employee at a business, you’ll need to show your W-2 forms from the last two years—as well as your two most recent pay stubs—to prove your income. If you have additional sources of income, such as bonuses, Social Security, or alimony, you should show proof of this, too.
Your income is a big deal to lenders, but your liabilities are nearly as important. After all, if you make a lot of money—but also owe a lot in bills—you might not be able to afford as much as someone who makes less but has very little debt. For this reason, prepare to show proof of what you owe your creditors.
So, what is needed for mortgage pre-approval when it comes to liabilities? Be prepared to make a list of all your bills, such as student loans, car payments, child support, utilities, and credit card payments. This will be compared against your income and assets — such as checking account balances, savings account balances, stocks, bonds, retirement funds, etc. to determine your debt-to-income (DTI) ratio.
The ideal DTI is 36% or lower if you want the best chances of being pre-approved for a mortgage. If you meet this qualification, this is a good start. But you’ll also need to show that you have enough for a down payment and closing costs, depending on the home loan you plan on applying for.
As you seek a mortgage pre-approval letter, you’ll need to make sure you have some additional information to show the lender. For instance, you’ll need to show your driver’s license and state your Social Security number before the lender can pull your credit report.
In addition, if you’re currently renting, you’ll need to show the contact information for any landlords you’ve had over the last two years. You might also need proof of payments for the last year. And if a friend or family member will be giving you money to help with your down payment, you might need to show the lender a letter stating that you’re not expected to repay those funds.
These are the most common items on the checklist of what buyers usually need to get pre-approved for a mortgage loan. Depending on the mortgage loan you want and your current circumstances, your lender might require more documentation, but this list should get you started on collecting the basics when it comes to what is needed for mortgage pre-approval.
Of course, your real estate agent can advise you on what you’ll need as you talk to lenders. If you don’t have one yet, come to LemonBrew Lending to work with a licensed loan originator in your state who will help you get started on the home buying process. We can also help you get insurance, title services, and more, so contact us today!