How To Get a Home Loan Pre Approval
Purchasing a new home is an exciting experience. Getting a pre approval for a home loan, on the other hand, can be a long and tedious process. But it doesn’t have to be!
A home loan pre approval is a major step to getting into that perfect home, and we’re here to help you understand how it all works. From learning what a home loan pre approval is to securing a loan for yourself, read on for our major tips and advice for all things pre approval related.
Why Is a Pre Approval Important?
A home loan pre approval is important because it helps you and the lender know what price of home you can afford and how much you can borrow. Pre approval can save you time and energy while looking for a new home because once you know how much money you can borrow from a lender, you can begin to look for homes within that price range. The sooner you get pre approved for a loan, the sooner you can buy a home.
What Is a Home Loan Pre Approval?
A home loan pre approval is an overall look at your financial health and history to help a lender determine how much money you can borrow for a home purchase. Lenders won’t just let anyone borrow money. They need to check your financial standing and have evidence that you can pay the requested loan back. A pre approval helps the lender determine how much they will allow you to borrow, and in turn, you know how much money you can borrow to look for a home within your budget.
Mortgage Pre Approval Process
There are many steps a lender needs to take in order to give you a pre approval for a home loan. That process starts with specific financial information you provide in order to get a clear understanding of your finances and the ability to pay off a loan of a specific amount. This process requires some time, and we recommend you get pre approved before you start looking for a new home.
What Do Lenders Look For?
The first part of a home loan pre approval process involves looking at certain parts of your financial history. Lenders want to know whether you have a stable income. They want to know how good you are at making payments on time. They want to know whether you have had any financial difficulties in the past. Remember, you’re trying to borrow money from them, so they want assurance that you’ll pay them back.
Here are a few things lenders look at during the pre approval process:
- Credit history
- Credit score
- Employment history
Your credit history provides a detailed look at how you’ve borrowed money in the past. Lenders want to know how much money you have borrowed from other lenders, banks, etc. They look at whether you have paid these loans back in time or if you have failed to make regular monthly payments. Credit history also shows any credit card use, car loans, business loans, small loans, and other similar credit. By looking at your credit history, a lender can determine how responsible you are with borrowing money.
It’s also important to note that you should not borrow more money during the pre approval process. Doing so could have a negative effect on your approval and lenders do not like to see you borrowing money for something else right before a major home purchase.
Your credit score is your overall grade for your credit history. The higher your credit score, the better your opportunity to borrow money for a home loan. In most cases, a credit score of 760 or higher is best for getting a home loan. During the pre approval process, a lender will look at your credit score and the factors that determine your score. This score gives them a high-level look at your financial health and history.
How much money you make greatly determines whether you will get pre approved for a home loan or not. Lenders want to know how much money you make and how regularly you make money. A stable, steady income always looks better to a lender than a large amount of money you may make here and there. Lenders need to know if you’ll pay back the loan, and how much you make will help determine how much you are allowed to borrow.
Your employment history plays a big role in getting pre approved for a home loan. By showing a lender you have a stable job, they will feel more comfortable lending you money. Someone who jumps from job to job may not get pre approved as easily as someone who has had the same job for several years.
Also, aim to stay at the same job during the pre approval and loan process. A new job in the middle of pre approval could cause a delay or prevent approval altogether.
Home Loan Pre Approval vs. Pre-qualification
You may hear the words pre approval and pre-qualification getting thrown around a lot, especially as you decide to look for a new home. Although some people use these words interchangeably, they are actually different.
Think of a pre-qualification as an estimate of how much money you can borrow for a home. This estimate may be close to the real amount, but in the end, it’s just an estimate.
A pre approval, on the other hand, looks at your financial history to provide you with an amount of money you are actually pre approved for. More information and decision goes into a pre approval over a pre-qualification.
When to Get Pre Approved for a Home Loan
We recommend you start getting pre approved for a home six months to a year before you begin looking for homes. The pre approval process can take some time, and you don’t want to find your dream home only to realize you can’t get the loan for it.
It is also wise to make sure your credit history is in good standing before getting pre approved. Remember, the better your credit score, the better the chance you have at getting pre approved for a loan. By cleaning up your credit history through online payments and minimal debts, you will have a better chance of getting pre approved.
How to Get Pre Approved
First and foremost, reach out to a lender to get started. If you’re not sure which lender to talk to, have a conversation with a real estate agent, or talk with friends and family who have recently purchased a home. They can recommend lenders to choose from.
Once you do find a lender, you’ll need to complete an application to get approved for a loan. There are eight steps involved in the application process, and we’ll go through them all below.
Eight Steps of an Application
- Type of Mortgage
Lenders need to know what type of mortgage you plan on getting before they’ll approve the loan. There are five types of loans:
- Conventional loan – best for borrowers with a good credit score
- Jumbo loan – best for borrowers who are looking to buy an expensive home
- Government-insured loan – best for borrowers with a low credit score and little to no down payment
- Fixed-rate mortgage loan – best for borrowers who want a stable, predictable monthly payment
- Adjustable-rate mortgage loan – best for borrowers who don’t plan on staying in the home long.
- Property Information and Purpose
Lenders need to know the address, type of home, and type of purchase the home will be used for. For example, a lender wants to know if the new home will be a rental or a primary residence. They want to know if it will be a second home or a place of business.
- Borrower Information
A lender needs your information, including contact info, social security number, credit history, and so forth. This information will help them be able to determine how much money you can borrow as well as how to contact you about loan approval and payment.
- Employment Information
A lender needs proof of income and will request employment information to know for certain you are employed. By providing the name, location, and contact information of your employer, a lender can determine if you are able to pay for the requested loan.
- Monthly Income
You will need to provide paycheck stubs, usually the last two checks or so, to prove you have a regular income. Your monthly income will help your lender know how much money you can borrow and pay back.
- Assets and Liabilities
Assets and liabilities are important for determining your overall net worth. You can also think of it as your debt to income ratio. The more money you have in overall assets (think of checking accounts, savings accounts, retirement funds, etc.) compared to any liabilities, such as money owed to other lenders, will help your lender decide how much money you can borrow.
- Details of the Transaction
If you have a specific home you’re looking to purchase, you will need to provide the details in this part of the application. Information, such as the seller and price will get added to the details of the transaction.
This section will ask you to declare any past or current judgments on your financial record, including bankruptcies or foreclosures, if any. It will also ask if you are a United States citizen.
Get a Loan Estimate Prior to Your Application
Getting a loan estimate before you apply for a mortgage loan will help you figure out how much money you can borrow for a home. This is just an estimate and you will need pre approval before you can purchase a home, but an estimate can help you find the right home and right mortgage for you.
Lenders need specific information before they can pre approve you for a home loan. You’ll want to provide several documents to your lender ahead of time. Below is a list of the documents you will need to gather before you get pre approval:
- Employment verification
- Credit history
- Debt to income
- One month’s worth of pay stubs
- Drivers license
- Social security number
Who We Recommend
At Next Level Homes, we’re dedicated to helping you get into the home of your dreams. We have beautifully built homes all along the Wasatch Front ready to become your forever home. Click the button below to schedule an appointment with our preferred lender and get started on finding the right home for you today.
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