What Does Prequalified Mortgage Mean
What Is Mortgage Prequalification? A prequalification generally means that a lender collects some basic financial information from you to estimate how much house you can afford. This is a good first step, but it typically wont carry as much weight as a preapproval because a lender hasnt yet verified your information.
It Can Affect Your Credit Score
If you get prequalified multiple times over a long period, such as once in January and again in June, your credit score will be impacted. This isnt ideal, since youre looking to apply for a loan with the most favorable rate and terms.
If you make mortgage prequalification inquiries over a shorter window, however, theyll have little effect on your score. Thats because credit scoring models group inquiries within a shorter period, typically 30 days, into one inquiry on your credit report. That means you should do all your shopping around in a short amount of time, if you can.
Its your right as a consumer to be able to shop between lenders to make sure youre getting competitive quotes, Carrasco says.
Once a lender pulls your credit, that same report will be used for underwriting if you submit a full mortgage application and the lender doesnt have to pull it again, since the report is good for 120 days, Carrasco adds.
Reasons To Get A Mortgage Pre
If youre soon to be undertaking the process of buying a home, then theres a strong chance at least someone has suggested that you get a mortgage pre-approval. And as it turns out, there are a lot of good reasons as to why you should do so.
A mortgage pre-approval is a statement from a lender that says you are qualified to borrow up to a certain amount. It also includes a specific pre-approved interest rate, though this number can change depending on how soon you put in an offer on a home since mortgage rates are variable. To come up with the promised loan amount, lenders take into consideration the same factors they would consider for a traditional mortgage approval, including your debt to income ratio and your credit score. The better your financial situation looks, the more youll be pre-approved to borrow.
So why is that piece of paper so key? In this article, well go over four of the biggest reasons why getting a mortgage pre-approval is important for buyers.
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Documents Youll Need For Nonconventional Loans
The documents listed above are typically required for both conventional and nonconventional loans, including FHA loans and USDA loans. However, some nonconventional loans may have other mortgage preapproval documents.
For example, since only certain people may qualify for the VA loan , youll need to provide further documentation to verify your eligibility. Depending on the borrower, such required forms may include:
DD Form 214: This verifies your military discharge, retirement or separation, and is required for veterans. Surviving spouses must provide their spouses DD Form 214, along with their marriage license and souses death certificate.
Retirement Points Statement : This form confirms the number of credible years of service in the military, including attending drills and going through training. This is needed for discharged members, who will also need to show proof of an honorable discharge.
Statement of Service: A statement of service proves active military status for active-duty service members, or current National Guard or Reserve members. It must be printed on official military letterhead and include the service members full name, date of birth, Social Security number, entry date of duty and time lost. It may also include credible years of service, date of activation, orders activated, training status and the name of the commander providing this information.
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Get Preapproved As Early As Possible
If you are starting your homebuying process, a mortgage preapproval letter says how much that lender is willing to lend to you. In other words, you will know how much house you can afford, making your house hunting process easier for you and your real estate agent.
Bear in mind that the letter may have an expiration date .
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How To Get A Mortgage Pre
Start by determining who you want your lender to be. You can get a mortgage pre-approval from up to three different potential lenders, and its a good idea to do so, since it will allow you to compare rates and select the option with the most optimal lending terms.
In order to provide you with a pre-approval, each lender will need some specific information in regards to your finances:
- Personal information. Have your social security number ready, as well as proof of identity. Lenders will use this information to run a credit check. If youve recently changed your name, youll want to supplement your proof of identity with additional proof, such as a marriage license or divorce certificate. The credit check is necessary, since it will give lenders insight into your debt to income ratio, as well as your financial history.
- Income information. Lenders are going to need proof of your income for the past two years, including all W-2s and/or alternate tax information, pay stubs, and information related to other sources of income that you may have.
- Asset information. Finally, youll need to provide any documentation related to assets outside of your income, including any large monetary gifts or investments. You may be required to provide a letter from anyone who is gifting you with substantial funds to put toward the purchase of your home.
How To Prequalify For A Mortgage
You have decided to buy a house, but dont have enough money to make the purchase. Your situation isnt unique, few people have enough cash on hand to buy a home. However, banks and mortgage companies offer loans, called mortgages, which provide people with the difference between what they have saved and the price of the home they wish to purchase.
While many people find the home they want and then look for a mortgage, its a good idea to look at your mortgage options first. Its important to know how much youll be able to borrow before you find a house.
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Do Mortgage Lenders Look At Your Spending
How you spend your money each month can have an immediate affect on your mortgage approval. Banks check your credit report for outstanding debts, including loans and credit cards and tally up the monthly payments. Bank underwriters check these monthly expenses and draw conclusions about your spending habits.
What Is Mortgage Preapproval
Preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide. Theyll also perform a credit check. If youre preapproved, youll receive a preapproval letter, which is an offer to lend you a specific amount, good for 90 days.
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Which Is Right For Me
First-time homebuyers are more likely to find that getting prequalified is helpful, especially when they are establishing their homebuying budget and want an idea of how much they might be able to borrow.
Preapproval can be extremely valuable when it comes time to make an offer on a house, especially in a competitive market where you might want to stand out among other potential buyers. Again, a seller will be more likely to consider you a serious buyer because you have had your finances and creditworthiness verified.
Ready to prequalify, get preapproved or apply? Get started with the Digital Mortgage Experience.
Check Your Credit Score
The first place to start is reviewing your credit report and getting your credit score. Check with your bank or your credit card companies as they’ll often provide these for free. And each of the three national credit rating agencies, Equifax, Experian, and TransUnion are required to provide you with one free credit report per year.
You can request a report by going to annualcreditreport.com, or by calling the credit reporting agencies. If you’re planning to purchase the home with your spouse or another person, they need to request and review their credit reports as well. Review your credit reports for any incorrect information and, if you find any, contact the credit reporting agency to request a correction.
Check your , which is a number between 300 and 850. A higher score not only improves your chances of getting a mortgage loan, but may also help you qualify for a lower interest rate.
Don’t wait until you have found the home you want before looking for a mortgage. This will give you time to improve your credit score by reviewing your credit report for accuracy, paying your bills on time, and reducing your balances on your credit accounts.
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Mortgage Preapproval: Everything You Need To Know
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
If youre thinking about owning a home, youll likely need a mortgage preapproval. A home loan preapproval gives you a snapshot of what you can afford based on the program you apply for.
A preapproval letter shows sellers youre solid financially, and if theres a lot of competition for homes in your area sellers wont consider your offer without one. Knowing the ins and outs of a mortgage preapproval will give you the edge you need to compete against other less prepared homebuyers.
Things to know first
Knowing how to get preapproved for a mortgage gives you an edge before you start house hunting
Many sellers wont consider an offer without a mortgage preapproval letter
Theres a big difference between a prequalification and a preapproval
Make sure you pick the right loan type for your mortgage preapproval
Have your financial paperwork ready before you apply for a preapproval
Learn what steps to take if youre denied for a preapproval
How Long Does A Mortgage Preapproval Take
Some lenders offer same-day mortgage preapprovals that include electronic verification of your employment, credit and assets. Others may take several days, depending on how complicated your financial situation is. Ask lenders upfront what their timelines are. Expect a longer wait if you have credit bumps or are self-employed.
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What Does A Preapproval Letter Include
A preapproval letter includes your name, the price of the home you gave when requesting the preapproval, the loan amount youre preapproved for and the expiration date of the preapproval. Some lenders also include conditions related to the preapproval in the letter, such as it only applying to a single-family home instead of multi-family property.
What Is A Mortgage Pre
A mortgage pre-approval means you are approved for a specific purchase price and loan amount. We underwrite your income and asset eligibility and provide an approval based on validated credit worthiness. This allows us to determine the loan amount for which you are likely to be approved for. Your pre-approval is usually valid for a particular time period, such as 90 days. To begin the process:
Apply for a home loan. Complete a mortgage application
Supply Documentation. Provide requested income and asset information.
An experienced Mortgage Specialist will walk you through the process.
So you can move quickly when you are ready to make an offer!
Other advantages of starting the loan application process early include:
- knowing the amount of your mortgage payment ahead of time
- being able to get all your documents in order
- having time to address possible credit errors and issues
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Why Getting Preapproved Is Such A Big Deal
Getting preapproved for a mortgage helps you shop for homes that you can afford and shows you are a serious buyer.
But a letter of preapproval is more than just a way to look good to sellers. It also helps you find the right mortgage lender and provides some flexibility in bargaining or negotiating for a better price range or specific costs, repairs, and improvements to a home.
Getting preapproved makes the entire closing process faster, too. It takes an average of 50 days to close on a house, and part of that period is due to the process of mortgage approval.
Being self-employed or having issues such as a low credit score previous, previous foreclosures, and outstanding debt can elongate the process.
It Makes You A More Attractive Buyer
There are two types of markets: buyers markets and sellers markets. In a buyers market, inventory is high and demand is low and you have a lot more lee-way in terms of the purchasing process. In a sellers market, however, inventory is low and demand is high, and buyers need any advantage they can get on their side if they want to eke out the competition.
Most markets go back and forth between these two varieties season to season and/or year to year. And if youre looking to buy in a sellers market, then one of the advantages that youre definitely going to want is a mortgage pre-approval.
Consider this: if there are two buyers making an asking price offer on a home and only one has a mortgage pre-approval, who do you think the seller is going to be more likely to go with? In almost all cases its going to be the buyer with a pre-approval, since theres a lot less risk to the seller of the deal falling through due to lack of appropriate financing.
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How Does Mortgage Preapproval Work
You get a preapproval letter by completing a loan application. Lenders will ask you for specific financial documents, like tax returns, pay stubs, and access to your bank and investment accounts.
All lenders have different processes and procedures, but most require you to sign off for a credit check and hand over other financial documents. Access to your allows the lender to see what you can afford to borrow and reasonably pay back through monthly installments. Depending on how much work is involved with your documents, it could take several days to review your application.
Lenders may provide varying levels of preapprovals. For example, Quicken Loans has three tiers of preapprovals ranging from a simple preapproval to an in-depth approval that includes up to a 90-day rate guarantee.
If you qualify, youll get a preapproval letter. This letter is usually valid for a maximum of 90 days but different lenders have different limits for how long preapproval letters are valid.
How Does Qualifying For A Mortgage Work
Mortgage prequalification is an early step in determining how much money a potential homebuyer can spend on a new house. During the process, a financial institution will review an applicants pertinent financial information, including credit, income and assets, and issue a prequalification letter. This document states that the lender is tentatively agreeing to loan the homebuyer a certain amount of money in order to purchase the property. It is not a guarantee.
The primary benefits of being prequalified for a mortgage are twofold: It provides a ballpark budget for those looking for a new home and ensures sellers that a buyer will likely be able to secure financing. Its not uncommon for sellers to require a prequalification letter before accepting an offer.
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Benefits Of Putting More Than 20% Down
If you’re able to do so, you may want to consider putting down a payment that’s larger than 20%. Here are some of the benefits:
- Lower monthly payment due to no mortgage insurance and smaller loan amount
- Less interest paid over the life of the loan
- More flexibility if you need to sell on short notice
When Should You Get A Mortgage Preapproval
You should get a mortgage preapproval if youre serious about looking for and making an offer on a home within the next two months. Preapproval letters are good for 30 to 60 days, according to the Consumer Financial Protection Bureau .
If it takes you longer than a month or two to find a home, the lender may need to update your preapproval with more recent pay stubs and bank statements. If your house hunt takes more than 90 days, the lender may also need to pull a new credit report, which may impact your credit score.
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You Can Learn More About Your Options
Although prequalification is not a formal process like preapproval, it gives a borrower the opportunity to provide some information to a lender on income, assets and liabilities, Cregger says.
Now that the lender has this information, you can learn about the different types of mortgages thatd fit for your situation, and potentially any first-time homebuyer programs or assistance you qualify for.
Perhaps you are able to purchase with less of a down payment than you assumed or perhaps your credit is in better shape than you thought, Garcia says. Understanding your options helps you make better decisions when it comes to selecting a home.
How Do You Prequalify For A Mortgage
When you want to prequalify for a mortgage, you should expect to provide the following types of information:
- Assets and investments
If you are seeking preapproval, you may need to provide pay stubs, employment history, tax returns, credit history, outstanding bills, bank statements, and other financial documents.
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