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Thinking about buying a house? You may be eager to jump into the process and start house hunting. But before you start, there’s one essential item you’ll need – a pre-approval letter. In this article, we’ll go over common questions about mortgage pre-approvals, including “why do I need a pre-approval letter in the first place?” and “how long does a mortgage pre-approval last?”
What is a mortgage pre-approval?
Let’s start with the basics. A mortgage pre-approval letter is a critical document in the home buying process. It demonstrates that a mortgage lender has reviewed your financial information and has decided whether you could be approved for a mortgage, aka home loan, and for how much.
Pre-approval letters are based on a few basic pieces of information about your financial status. These include key things like your personal income, proof of assets, credit score, proof of employment, and any other documentation that the lender may need to get an accurate picture of your finances. We’ll go over what lenders are looking for when they review these documents later in this post.
How long does the pre-approval letter last?
A pre-approval letter for a mortgage loan typically lasts 60 to 90 days. Once your lender has assessed your mortgage loan eligibility, they will usually draft your pre-approval letter within a few days. There’s an expiration date to pre-approvals because a lot can change for an individual financially in a matter of months. If you encounter any significant changes or your pre-approval expires before you buy a home, be sure to let your lender know as soon as possible. They can issue a revised pre-approval letter if needed.
Why should I get my mortgage pre-approval before house hunting?
Before you start browsing listings online or start interviewing real estate agents to help you find the perfect home, it’s crucial for serious home buyers to first talk to a mortgage lender. That’s because many real estate agents require their clients to get a mortgage pre-approval letter before house hunting. That way, the real estate agent can get a clear picture of your budget. This information will also help your real estate agent narrow down your home search to fit your current price range, criteria, and potential loan amount.
Another benefit of meeting with the mortgage lender before shopping for homes is that you’ll get a clear picture of your purchasing power based on current interest rates and your current financial situation.
Additionally, having a pre-approval will come in handy when you’re ready to start making offers on homes. By including your pre-approval letter with your offer, you’ll show sellers that you’re a serious home buyer who has all their financing ready to go.
How do I find a lender for a mortgage pre-approval?
The first step to getting a mortgage pre-approval is finding the right lender. Not sure where to start when looking for a mortgage lender? Most homebuyers rely on immediate and extended family or friends and co-workers for referrals on a trustworthy mortgage lender. While this can be a good starting point, it’s good to shop around until you find a lender that offers the best loan options for your personal and financial goals.
What information do I need for a mortgage pre-approval?
Mortgage lenders will request quite a bit of information to get a snapshot of your current and future finances. They need this information to make sure your pre-approved loan amount is affordable both now and later.
Before you complete your mortgage pre-approval application, you will want to do some data gathering on your current financial situation. First, take a good look at your credit report, so you can confirm that the information is accurate and that there are no surprises. Checking your report also gives you some time to clear up any discrepancies on your credit report before starting the pre-approval process, which can help save you time and money in the end. You should also take a look at your current debts to see if there are any accessible opportunities for improvement.
You should also start gathering copies of your bank statements, pay stubs, and tax returns. Here’s what lenders will be looking for using these pieces of information:
Proof of income
Buyers are required to provide W-2 or 1099 statements from their employer, generally dating back the last two years. You will also want to give the mortgage lender your most recent pay stubs and proof of any additional income, such as company bonuses, alimony, etc.
Proof of assets
Your proof of assets, such as the money in your bank accounts and any investment accounts, will prove that you have enough funds for the down payment and any closing costs for your future home. The minimum down payment required will depend on the sales price of the home you intend to purchase and can vary by loan type.
Your credit history is an essential piece of information for a lender since it’s a direct reflection of your past ability to pay off debt. Lenders usually have minimum credit score requirements for them to offer a home loan. Typically, a FICO score of 620 or higher is needed to approve a conventional loan. Borrowers with excellent credit scores, ranging from 760 or higher, usually get access to the lowest interest rates. There are still options out there for those who have lower credit scores, which your lender can share with you.
Insider tip – Some borrowers may get concerned about credit checks if they’re getting pre-approved with more than one lender. The good news is that if several mortgage lenders check your credit score within 45 days of the first credit check, those additional checks won’t affect your credit score.
When it comes to lenders pre-approving home loans, they want to see that the borrower has stable employment now and in the future. Pay stubs only tell part of the story, so lenders may also verify your employment status directly with your employer. If you have recently changed jobs, they may ask for more information about that as well. For those who are self-employed, most lenders require at least two years of personal and business tax returns.
What happens after I get pre-approved?
With your pre-approval in hand, you can also start to research neighborhoods with homes in your price point. Now is also a great time to go over the different loan types that each lender can offer. These early conversations will help you determine if this is the right lender to complete your final mortgage application with once you’ve found your dream home.