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Getting Pre-Approved When House Hunting
What are the benefits of getting pre-approved when house hunting?
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3 Replies
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In this guide, we will cover the importance of getting preapproved when hunting for housing. Homebuyers need to realize that getting preapproved when house hunting is not an option but hands-down, given that they want a smooth house hunting and mortgage process.
Why Preapproval Is Important
Clarity of Budget: It’s possible to understand how much you can borrow through preapproval, helping you narrow your search to homes within that price range.
Stronger Offers: A seller may take your offer more seriously if it is accompanied by a preapproval letter, which shows that the buyer has the financial means to close on their transaction.
Quicker Closes: Most of the financial vetting is already completed during preapproval, which could speed up closing times.
Steps to Get Preapproved
Gather Financial Documents:
Income Verification: Paystubs, W2s, tax returns
Credit Information: Credit reports and scores from all three bureaus
Asset Information: Bank statements, retirement accounts, etc…
Choose a Lender:
Research different lenders and compare terms/rates
Consider multiple preapprovals from different lenders to compare offers.
Submit an Application:
Complete the application form to get preapproved accurately with honest information about income, debts, and assets.
Credit Check:
The lender makes a hard inquiry on the credit file, which assesses creditworthiness based on lending criteria used by this particular institution at the given period when such action was taken. It also includes checking data accuracy, etc.….
Lender Review:
The lender reviews the documents provided along with the credit report(s) obtained so far and determines the maximum amount they would be willing to lend under present circumstances, considering the applicant’s ability to repay debt, current financial position, etc.
Receive Preapproval Letter:
If approved, they will issue a letter stating the amount qualified to borrow (usually good for 60 -90 days).
Factors That Affect Preapproval Amount
Credit Score:
Higher scores usually result in better loan terms, such as lower interest rates or larger approval amounts.
Debt-to-Income Ratio(DTI):
- It is highly recommended borrowers have less than 43% DTI.
- However, borrowers can get mortgage loan approval with a debt-to-income ratio as high as 46.9% front-end and 56.9% back-end preferred by lenders (the amount of money debtors make divided into monthly payments) on FHA loans.
- Fannie Mae and Freddie Mac allow up to a 50% back-end debt-to-income ratio on conventional loans.
- Conventional loans do not have a front-end debt-to-income ratio cap.
- USDA loans allow up to a 29% front-end and 41% back-end debt-to-income ratio cap.
- There is no debt-to-income ratio cap on VA loans.
- Borrowers can get approved/eligible per automated underwriting findings on VA loans with DTI higher than 60% if the borrower has a high residual income. No-QM loans cap a debt-to-income ratio of up to 50%.
- However, many non-QM loan programs have alternative ways of qualifying the borrower’s debt-to-income ratio and no-doc mortgage loan programs.
Employment History:
A longer, more stable work history shows reliability, which is helpful when trying to get preapproved for a home loan.
Down Payment:
Putting more money down at closing increases the chances of being preapproved for a larger loan amount and possibly even more favorable terms.
Tips for a Smooth Preapproval Process
Check Your Credit:
Request credit report(s) from all three bureaus and correct any errors found. These could lower your score, causing higher interest rates or denying you altogether.
Reduce Debt:
Pay off existing debts such as credit cards, student loans, etc.… This will decrease the DTI ratio, thus increasing the odds of getting preapproved.
Save Up for Down Payment:
Most lenders require a 20% down payment on conventional mortgages, so start saving now to avoid paying PMI (Private Mortgage Insurance) and secure better overall loan terms.
Keep Financial Documents Organized:
Having all necessary paperwork ready when called upon saves time during review stages by making it easier for underwriter(s) to access needed information quickly, thus speeding up the entire process.
Getting preapproved for a mortgage is an important step in buying a house. It lets you know your budget, makes sellers take your offer more seriously, and can speed up the closing process. Gathering financial documents, choosing a lender wisely, and understanding what affects how much you can be approved for are steps that should be taken toward becoming preapproved.
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How long before buying a house should you get pre-approved? Is it true that borrowers should get pre-approved between 1 and 4 months before buying a house? If I am a first-time homebuyer, when should I get pre-approved for a mortgage? How long before buying a house should you get pre-approved? Can you tour a house without a pre-approval from a mortgage loan officer? Can you make an offer on a home without a pre-approval letter from a mortgage company? Does a pre-approval hurt your credit? How much does a pre-approval cost? Can you get denied a mortgage after getting pre-approved for a mortgage? How fast does it take to get pre-approved for a mortgage?
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Here are some responses to your questions about mortgage pre-approval:
When to seek pre-approval:
- Getting pre-approved for a mortgage one to four months before buying a house is a good idea.
- For first-time buyers, the best time is three to six months in advance, so there’s enough time for any credit issues to be resolved.
Why this should be done now:
- Generally speaking, a mortgage pre-approval lasts between 60 and 90 days.
- You want to have some time where you can shop without feeling rushed.
- If any problems arise while getting approved, you’ll want time to fix them.
Visiting homes without pre-approval:
- You may tour homes without being pre-approved beforehand.
- However, many agents prefer that clients obtain this step before showing properties.
- In competitive markets, it is common practice for sellers only to allow tours if they see formalized approval letters from lenders as proof of a buyer’s readiness.
Making offers without being approved first:
- While someone who has not been previously approved can certainly make an offer, it isn’t recommended!
- This is because most sellers either strongly favor or outright require offers from parties already vetted as qualified borrowers by banks or other lending institutions.
- In addition, prequalified buyers often receive more serious consideration when submitting bids on houses than those whose financial eligibility remains to be determined.
- Due diligence performed ahead of time would be good.
Consequences For Your Credit Score
A hard pull usually occurs when someone gets their mortgage application reviewed, which could temporarily decrease their credit score (se).
However, multiple inquiries within 14-45 days generally count as one single inquiry instead, just like people used to think when they were still unaware of this fact.
How much does it cost?
Most lenders provide free initial assessments, but some charge fees between $300 and $400, so always ask upfront about charges before proceeding further down the line.