Purchasing a new home may be one of the largest investments you make in your lifetime. Whether you are a first-time homebuyer or are looking for your forever home—or both—you will benefit from understanding how to get preapproved for a mortgage.
Generally, preapproval, before you begin shopping, will make you a more informed buyer. During the mortgage pre approval process, you will gain a firm sense of how much home you can afford at the outset of your home-buying journey. This will allow you to shop with confidence as you view homes and consider making an offer.
What Is A Mortgage Preapproval?
Through the mortgage preapproval process, a potential home buyer engages with a lender. As the buyer, you may apply to a lender for preapproval for a home mortgage. If you are preapproved, you will receive a letter stating the lender’s tentative willingness to lend you a certain amount of money for a house.
Preapproval Vs. Prequalification: What Is The Difference?
Both prequalification and preapproval provide an assessment of your finances and can help you understand the kind of home you can afford. The two processes are slightly different. Prequalification is an optional step to take before you obtain preapproval for a mortgage.
Through the prequalification process, a lender collects your financial information but does not pull your credit report or review documents, like tax returns and bank statements, to estimate what you can afford.
Once you are prequalified, your lender will provide a letter that fulfills two purposes. In addition to providing an idea of what you can afford, the letter affirms to sellers that you are currently working with a lender.
The prequalification letter includes:
- Your potential loan amount
- Your interest rate
- Other terms and conditions of your potential loan
Many lenders stipulate that the terms of the letter are good for up to 30, 60 or 90 days. For this reason, prequalification may sometimes come with a shorter expiration date than preapproval and is only a precursor to the next step.
Preapproval is different from prequalification in that it provides more than a snapshot of your financial situation. It is an official, though provisional, confirmation of the amount of money, interest rate and terms a lender are willing to offer.
What Is A Mortgage Preapproval Letter?
If you are preapproved, your lender will provide a mortgage preapproval letter. The mortgage preapproval letter contains:
- Your estimated loan amount
- Your interest rate
- Your potential monthly payment
- The provisional terms of your potential loan
Like the prequalification letter, your preapproval letter may also include an expiration date. If your house hunt continues beyond the date of the preapproval letter, you should contact your lender to discuss an extension or to reapply.
The content of the mortgage preapproval letter is based on a comprehensive view of your finances. It not only tells you what you can afford but also confirms to sellers that you are financially capable of affording a home. In fact, your preapproval letter can accompany any offer you make on a home.
A preapproval letter does not guarantee you a mortgage loan. It is not an official agreement between you and the lender. This means you are free to apply to other lenders when you are ready to purchase a home.
How To Get Preapproved For A Mortgage
Let’s break down the preapproval process step-by-step.
Step 1: Know your credit score
Get your free credit report via government trusted site www.annualcreditreport.com. In addition to your credit score, you will find out if you have any issues with creditors that need to be disputed or otherwise resolved. Advice on healthy credit scores varies, but generally, a score of more than 620 is helpful for preapproval.
If you are a member of Arizona Central Credit Union, you can can view your credit report through our SavvyMoney tool.
Step 2: Calculate your DTI
DTI stands for debt-to-income ratio. This is the percentage of gross monthly income that goes toward debt payments, including credit cards, student loans and car loans. While DTI requirements may vary depending on the lender, generally, lenders prefer borrowers with a DTI of 36% or below. This includes the mortgage, though it can be higher.
Step 3: Gather relevant documents
The lender to which you are applying for preapproval may require documents such as pay stubs, your income tax returns, W-2s and bank statements. If you are self-employed, you will need further documentation. In addition to your application and financial documents, a lender will pull your credit report. The lender uses all of these items to review your earnings, debts and assets.
Step 4: Submit documents and application to your lender
Once you submit your documents and application to your lender, the lender can respond with your preapproval letter within a matter of days or weeks.
Step 5: Apply to more than one lender
You may choose to apply to several lenders. This will allow you to compare offers from each and choose the lender with the most affordable rates and fees. You will also want to time your preapproval applications right. Since preapproval letters may only last for up to 90 days or less, you should not get preapproved too early in your house search.
Why It’s Beneficial To Get Preapproved For A Mortgage
Obtaining preapproval for a mortgage is helpful in your home search for several reasons.
- Preapproval carries weight with sellers. Many sellers and selling agents will not consider an offer on a house until the buyer is preapproved.
- A preapproval letter will help you understand what kind of home you can afford. This is helpful as you narrow down your search and prepare to make an offer on a house.
- Because a preapproval letter contains information, like the potential amount of your mortgage payment, the preapproval process can help you with your financial planning.
After the mortgage preapproval process, you will also have a sense of the larger picture of your financial health. This knowledge can come in handy when making future large purchases and investments.
Arizona Central Credit Union Can Help You Secure The Home Of Your Dreams
Obtaining preapproval for a mortgage can kick-start the search for your forever home. If you are ready to begin that important process, contact Arizona Central Credit Union for more information. We offer home loans and personalized services that will ease you along the path to owning the home of your dreams.
