Get Preapproved for a Mortgage Loan
Getting preapproved for a home mortgage loan is the first step to getting the actual loan. Through this process, a mortgage lender or broker will review your qualifying criteria (credit score, income, debt, etc.) to determine how much they are willing to loan you. If you'd like to learn more about the preapproval process first, continue reading below. We have compiled all of the information you need to understand this step in the mortgage process.
Mortgage Preapproval Explained
When you get preapproved for a mortgage loan, you are essentially finding out how much money a particular lender is willing to lend you. The word "particular" is a key part of that last sentence, because Lender 'A' might be willing to give you more or less money than Lender 'B.' They all have slightly different underwriting and approval guidelines. But let's stay on track here. Preapproval goes a step further than prequalification, which is just a basic review of your finances. Through this process, a lender will review your finances in greater detail and will preapprove you for a certain amount. Before we go any further (and before I confuse you with any more lingo), let's define each of these similar-sounding terms:
Prequalification -- The process of determining how much a borrower (home buyer) can afford to borrow, based on a basic review of their finances. Gives you a general idea of what you can borrow. Generally does not require a formal mortgage application. Pre-qualification is non-binding, which means there is no guarantee you'll actually get approved for this amount.
Preapproval -- Similar to the prequalification process described above, but based on a more in-depth review of the borrower's financial history. Gives you a more accurate idea of how much you can borrow. Generally requires a mortgage application. This process takes place before you have selected a home, which distinguishes it from the final approval described below. Pre-qualification is non-binding.
Approval -- This is the final approval by the mortgage lender. It takes place after you have chosen a home and made an offer. It usually requires a home appraisal as well.
So there you have them -- the three mortgage terms that create the most confusion among first-time home buyers. I hope this clears things up for you. Here's something else to keep in mind...
If you wanted to, you could skip the first two steps listed above -- but obviously not the last step. Theoretically, you could start house hunting before you even get a prequalification or preapproval letter from a lender. Or, you could skip the prequalification process and request a more thorough preapproval review, right from the start.
What's my advice? I recommend the second path I just described. I recommend that you apply for the preapproval process before you hire an agent or start looking at houses. Here's why: Being pre-approved for a home loan helps you in other ways as well. For one thing, it shows the sellers that you're capable of buying their home. This can give you a leg up during the offer process, especially when multiple buyers are competing for the house. When you've been preapproved by a mortgage lender, it's the next best thing to having the money in hand. Of course, the preapproval is not a binding agreement, so you don't know for sure if you'll get final approval for that amount. But it gives you a pretty good idea of what to expect.
If you'd like to get started right away, just click on the link above and provide the information requested on the following page. Or, if you'd like to learn more about the mortgage pre-approval process before venturing into it, you should refer to the information below.
How to Get Preapproved
As we discussed earlier, it varies from one lender to the next and also from one borrower to the next. There are many variables at play. But there are certain things you need to have going for you, regardless of which lender you choose. Here are some things you should strive for, if you want to get approved for a mortgage with a decent interest rate:
- Let's talk credit scores. If you want to get pre-approved for a loan (just to get your foot in the door), you'll probably need a FICO score of 650 or above. Not written in stone. Just an average. If you want to qualify for the best rates, you'll probably need a 760 or above.
- You'll also need a down payment of some kind. The size will vary based on the type of the loan and other factors. FHA loans require 3.5% down, and traditional loans require anywhere from 5% - 20% down. This won't be needed for prequalification or preapproval, but it will be for the final approval. The lender will check your bank statement to make sure you can afford it.
- Your debt-to-income ratio will also be reviewed. This ratio compares how much money you pay toward your debts each month, relative to your overall income. If you're buried in debt, you probably won't get preapproved for a home loan.
- You will need a certain level of income to get approved for a mortgage loan. Lenders have different guidelines in this area too, so the minimum requirements will vary.
In closing, I'd like to point out the difference between mortgage approval and affordability. It's possible to get approved for a loan that's too big for you. It happens all the time, and it's a leading cause of foreclosure. Just because you get pre-approved for a certain amount doesn't necessarily mean you can afford that amount. So you should determine your home-buying budget before we get started on your prequalification.