If you’re in the market to buy a home and wondering about the first step, start by creating a comprehensive checklist to help navigate the process and ensure you’re prepared for everything that’s involved. One of the items that should appear towards the top of that list is securing a mortgage preapproval. This is especially important when interest rates are expected to rise as you can lock in the current rate for 90-120 days while you look for a home.
Receiving a mortgage preapproval indicates that you’ve been qualified for a specific loan amount at a certain interest rate for a set period of time, typically 90-120 days. The preapproval is an important part of the homebuying process and has many benefits. As a buyer, it lets you know how much you can expect to borrow and determine your monthly mortgage payments, can offer leveraging power with sellers given your financing is already in place and provides a distinct advantage over non-approved buyers. Preapproval status also demonstrates that you have the financial means to make a serious offer and can likely secure a speedier closing transaction, making you more appealing to sellers.
During the preapproval process, your lender will undertake an assessment of your financial situation and creditworthiness to determine whether you meet the requirements to secure financing. For your part, you’ll need to provide a significant amount of information and formal documentation. Ensuring you have everything in order before your mortgage agent finds a lender to preapprove your mortgage will help facilitate and expedite your application.
Mortgage preapproval requirements
Maintain a solid credit score
Analyzing your credit score is one of the first and most important steps in the preapproval process. Lenders look for a consistent pattern of paying your bills on time and managing your debt responsibly. Exercising wise financial decisions will ensure your credit remains in good standing, which will greatly increase your chances of preapproval. If you have bruised credit, speak with your mortgage agent for ways to make improvements. It’s always good practice to monitor your credit report on a regular basis to ensure it’s up to date and doesn’t contain any errors.
Provide proof of down payment
The size of your down payment will determine the amount you can borrow so the more you can save, the better. If the down payment is less than 20% of the home’s purchase price, you’ll be required to purchase mortgage default insurance, which your lender will need to incorporate into your borrowing total. You’ll also have to provide proof that the funds are coming from a source that’s deemed acceptable.
Maintain consistent employment
Providing proof of employment and income stability will increase your chances of a preapproval, and having the required documentation such as income tax statements, pay stubs and letters of employment will help accelerate the proceedings. You’ll also want to provide proof of any additional sources of income such as salary from a second job, commissions, bonuses or investment interest. Most lenders will want to see at least two years of consistent income and steady employment so, if possible, avoid taking on a new job until after your closing date.
Ensure stable finances
Lenders want to ensure that you can afford to pay back the amount you borrow and will be looking to see a consistent balance in your bank account. Make sure your bills are paid on time and refrain from making large purchases – such as vehicle leases or financing – which could hinder your chances of being preapproved.
Maintain low debt levels
Based on your current financial information, lenders will calculate your monthly costs and total debt load by using a debit-to-income ratio, which is a measurement of income to monthly credit and liabilities. The lower the score the better, so avoid taking on too much debt and pay down any outstanding balances.
Remember the stress test
Federally-regulated lenders are required to apply a mandatory stress test when assessing mortgage financing. This involves homebuyers proving they can afford payments at a qualifying interest rate that is higher than the actual rate on the mortgage contract. It’s a good idea to speak with your mortgage agent to ensure you understand what’s involved.
Planning to buy a home? Make sure your mortgage agent secures a preapproval for you first. Answers to all your questions are a call or email away!