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The Mortgage Preapproval Process

According to LendingTree, a mortgage preapproval is written verification from a mortgage lender, which states that you qualify to borrow a specific amount of money for a home purchase. The amount you’re approved for is based on a review of your credit history, credit scores, income, debt and assets. Lenders will typically review your credit report with your permission to determine whether they can issue a preapproval. Lenders will also consider your debt-to-income ratio, down payment and closing costs funds, income and employment, and any funds you have on reserve during the preapproval process. Read on to learn more about how to prepare for this process and what specific documents you will need.

Preparing for Preapproval

During the preapproval process, your credit reports and scores will be pulled, so it’s important to ensure your credit score is where you want it to be before beginning this process. A higher credit score can help you save on interest costs and fees. For most people, a FICO score of 620 or better is typically required for a conventional home loan, and a score of 760 or higher should help you qualify for the best interest rates. Remember that your credit score may drop slightly after the lender checks your credit report. This decrease is only temporary and if you’re obtaining preapprovals from more than one lender, you can limit the impact on your score by getting them all within a 45-day period.

If you have all your documents ready and you’re eligible for a home loan, many mortgage lenders can issue a same-day preapproval — or, at most, within a few days. A mortgage preapproval typically expires after 90 days but some lenders have shorter or longer windows available. Some lenders will also offer the preapproval for a specific period of time and an interest rate lock for a shorter time period. Research this ahead of time to ensure you’re ready to start the process. It’s possible to get a new preapproval if you don’t find a home within the original preapproval timeline, but the new preapproval will be based on your current financial situation and may require updated paperwork.

What documents are needed for preapproval?

In general, you will need to share:

• Pay Stubs from at least the past 30 days

• Tax Returns (including W-2s) from the past two years

• Financial institution statements from the past two to three months. This includes statements for all your checking, savings and money market accounts.

• Employment information. Contact information for any employer(s) you have had in the past two years. Check with your employer(s) to see if they have an employment verification phone number lenders can call.

• Business records if self-employed. Any business tax returns that are separate from your personal taxes. In addition, lenders may ask for year-to-date profit and loss statements, a business license, a list of accounts receivable, and 1099s or other proof of steady income.

• Other income sources. If you receive bonuses, child and/or spousal support, disability or VA benefits, pension, Social Security, etc., include documentation of those additional income sources.

• Retirement and investment account statements from the past two months to three months. This includes any 401(k)s, IRAs, certificates, mutual funds, or other investment or retirement accounts you have.

• Down payment gift letter if applicable. According to Bankrate, a gift letter verifies the source of a homebuyer’s gifted down payment funds and proves that the funds are a gift and don’t need to be repaid, and that the giver isn’t involved in the purchase or ownership of the home. Depending on how long the gifted funds have been in your account, you might not need to provide a gift letter. Check with your lender to see if you need a down payment gift letter and, if so, if they have a template for you to follow.

• Information on other real estate if you have multiple properties. Provide information about your additional real estate’s value, occupancy status and purpose, as well as the property’s monthly expenses. You will also need to include information about your current mortgage, including the lender’s name and account number, the loan types, your monthly payment amount, and the outstanding balance and credit limit.

• Loan statements from the past 60 days. This can include information regarding vehicle loans, credit cards, personal loans and student loans.

• Rental history. Include contact information for landlords and proof of rent payments, such as canceled checks or paid receipts.

• Driver's license, Social Security card, or other form of legal ID.

• Recent residences and time spent at each.

In addition to these items, your credit reports and scores will likely be retrieved by your lender with your permission.

Next Steps

If you’re ready to start the process, here’s a mortgage preapproval checklist to keep you on track:

• Gather documents. It’s a long list. You’ll need to have your pay stubs, W-2 forms, tax returns, financial institution statements, employment information, business records if self-employed, other income sources including alimony/child support documents if applicable, retirement or investment account statements, down payment gift letter if applicable, information on other real estate if you have multiple properties, loan statements, rental history, recent residence addresses and time spent at each, driver’s license, Social Security card, or other form of ID.

• Review your credit report and improve your credit score if needed. If you find any errors as you review your credit report, take steps to get them removed and pay down revolving debt, if necessary, before starting the preapproval process.

• Fill out an application or set up a preapproval meeting with a mortgage lender. Avoid making any large purchases or opening new lines of credit while in the process of getting preapproved or once preapproved prior to closing on a home.

The homebuying process can be confusing and overwhelming at times. Having a clear idea of how to get preapproved can help you begin the process on a positive note. Take the time to research different lenders and their requirements, prepare documents, get your credit report and scores where you want them, and then fill out an application or set up a meeting with a mortgage lender. You may find out you’re able to make an offer on a home that day. Happy house hunting!

Sources:

https://www.bankrate.com/mortgages/documents-for-preapproval/#faq

https://www.lendingtree.com/home/mortgage/pre-approval/

https://www.bankrate.com/mortgages/gift-letter-for-mortgage/

https://www.experian.com/blogs/ask-experian/down-payment-gift-rules/

https://www.cnbc.com/select/credit-score-needed-to-buy-house/#:~:text=A%20FICO%20score%20of%20620,for%20the%20best%20interest%20rates