5 Steps to Getting Preapproved for a Mortgage

The coronavirus pandemic is a very scary situation. It's affecting everything—including your finances. This is no time stick your head in the sand and hope it won't have a significant impact on your finances by the time it's all over. It's important that, with every announcement, you consider your options.

One such situation is the Federal Reserve reducing interest rates. That means different things for different people but, if you are in the market for a new home, now is the time to get a mortgage!

With spring and summer rapidly approaching, countless homes are going on the market—and even more people are preparing to buy them. If you're one of those people, congratulations! Buying a home is an exciting thing. However, home loans can be a little intimidating. We’re here to help.

Whether it's your first home or you've been through the process before, here's a rundown on how to get preapproved for a conventional mortgage.

1. Prequalification vs. preapproval

First, you need a basic understanding of prequalification vs. preapproval. When you begin shopping for a home, you may start with a prequalification letter from a lender. You'll tell the lender about your credit, debt, income and assets, and they'll give you a rough estimate. This gives you a good idea of the price range you can afford to shop in. You can usually get a prequalification letter within three days or so.
 

2. Check your finances

Take a good hard look at your finances—and your partner's, too, if you're buying with someone else. Get a solid idea of what you can afford instead of just using the prequalification amount before you begin looking at potential homes.

Experts say you shouldn't spend more than 25% of your monthly gross income on a mortgage payment, so start by calculating what that number should be. From there, look into what property taxes in your area are, what HOA fees you might expect to pay, how much insurance you should anticipate paying and other existing debt.

In addition, budget for the upfront costs of buying a house. These include inspections, appraisals and more.

3. Learn the market

Before you spend any money, you should find out what kind of market you're in. Is it a seller's market or a buyer's market?

Look into what homes in your area—or the area in which you wish to live—are selling for. Are they in your price range? How's the neighborhood? Are they by the schools you want your children to attend? What will your daily commute look like?

Once you get the ball rolling on your mortgage, things will start to happen very quickly. You'll be ahead of the curve if you know the answers to these questions.

4. Gather your documents

• Personal identification: A driver's license will usually do, but some like to ask for social security information as well.
• Two years of tax returns: Your most recent federal and state returns help to verify your overall financial situation. You may have to contact your accountant for these, so start early!
• Proof of employment: A recent pay stub or your latest W-2 will help your lender verify employment information and what you can afford.
• Banking statements: Use your financial institution’s online banking portal to access 60 days’ worth of statements from every account you are using to qualify. Your lender will use this information to assess your debts, recurring payments and spending habits. Be aware that you may be required to provide a letter of explanation for larger deposits.
• Your credit history: Your credit report will typically be pulled by the lender as another verification of your debts and what mortgage payment you can qualify for.
  
  Sometimes, friends or family members will give new homebuyers a monetary gift to help them with their down payment. If this applies to you, you'll likely need to write or ask for a gift letter. This explains to the lender where the money came from, that it’s not a recurring source of income and that you don’t have to pay it back.
  
  Lenders may also ask you for documents to demonstrate your rental history. The lender may or may not contact your previous landlords for references.
   

5. Contact more than one lender

When choosing a lender, it pays to shop around.

According to NerdWallet’s 2019 Home Buyer Report, comparing lenders for an average-size home loan could save $430 in interest, on average, in the first year, or $9,200 total over the course of a long-term mortgage. Ask your friends and family for recommendations, and don't forget to look at credit unions as well as major banks.

While each lender will run a credit check on you, shopping around won't drastically hurt your credit score. Experts do recommend, however, submitting all applications within a 30-day period to mitigate potential damage.
 

6. Get your preapproval letter

Once you're ready to start making offers, you may need a preapproval letter. This is a much more definitive statement from a lender and lets the seller know that your finances are in order.

The process of getting preapproved can vary in time frame, depending on your individual situation. You should hear back within a week or so once you give all the required personal information to the lender. If the preapproval loan amount is not what you were hoping for, you'll need to spend a few months working to raise your credit score or adjusting your finances.

Once you get preapproved, you're well on your way to living in your dream home. If you’d like to further discuss your mortgage options or need help navigating the home buying process, schedule an appointment with one of our mortgage lenders today by giving them a call at 1-800-748-4302.