Big houses will cost more, and let’s face it, you don’t have that kind of money sitting in your drawer. This means you will need to acquire a bigger loan to get your dream house.
Wish it was that easy: you choose your dream house, ask for that kind of money from the lender and you can easily score the house. But sometimes, even the simplest process requires a lot of time, effort, money and well, patience.
If you want to look for a home loan, you first have to be preapproved for that kind of money. And the pre approval process will scrutinize a borrower and their creditworthiness.
Let’s get into details.
Table of Contents
- 1 What is Preapproval on Mortgage?
- 2 Credit Scores
- 3 Mortgage Pre Approval without Credit check
- 4 Mortgage Pre Approval Online
- 5 Best Online Mortgage Lenders 2020
- 6 Mortgage Pre Approval Checklist
- 7 How to get Preapproved for a Home Loan?
- 8 How far in advance should I get pre approved for a Mortgage?
- 9 How long does it take to get Preapproved for a Mortgage?
- 10 How long does Mortgage Pre Approval last?
- 11 Can you buy a house for more than your Pre Approval?
- 12 Pre Approval Mortgage Calculator
- 13 What to do if you have a Bad Credit Score?
- 14 Conclusion
What is Preapproval on Mortgage?
A preapproval simply means that a lender has gone through your financial situation, credit history, insurance records, debt and other notable data. After that, the loan officer determines how much loan you can borrow and how much monthly you will be able to pay for the mortgage.
But wait, being pre approved for mortgage does NOT mean you will get the loan! After the preapproval goes on successfully, you will be issued a letter which you can take to potential sellers. The advantage of having pre approval gives the satisfaction to sellers that your history has been examined by a loan officer and you can actually afford the loan you’re asking for.
Often at times, the credit score is the major deciding force of how much loan you will be approved for, if any.
A credit score is a number ranging from 300-850 that depicts how well and worthy a person is of a loan. The higher the credit score, the better your chances of scoring a bigger loan- and that too, very easily.
A credit score is based on various indicators: number of open accounts, total levels of debt, and repayment history, and other factors. Credit scores fluctuate with time; they are not a standard number that stay with you until the end. If you’re responsible for paying your dues on time, your credit score is likely to increase, and vice versa.
Most credit scoring systems use a scale that ranges from 300 to 850. There are, however, some credit scoring models that go up to 900 or 950, including industry-specific scores used by certain institutions.
So the highest score that you can go up to is 850. However, it is not necessary for you to exhaust yourself into reaching that 850. Any score in late 700s to early 800s is great! You are good to go with proceeding with that home loan!
This is the average breakdown to be mindful of:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Mortgage Pre Approval without Credit check
Getting pre approval for a mortgage without a credit check seems like a dream to most applicants because it gives a chance to low credit borrowers to apply for a mortgage and actually get approved for it too.
If you qualify for a personal loan, there are chances it won’t affect your credit history provided that all other documents are well-credited and even with a low score the lender believes you can pay off your loan in due time.
Of course, for a bigger mortgage loan, lenders are bound to scrutinize your credit history and previous insurance records, but for average mortgages this may not be the only deciding factor. You can still get a mortgage pre approval without credit check if all other credentials are well maintained.
Mortgage Pre Approval Online
Even though it is recommended that you should meet your lender in person to discuss the terms and conditions of your agreement, ask questions and get answers. But that isn’t the only way. Once you decide to move forward with the mortgage application with your chosen lender, you can easily get the pre approval online through email or through fax.
It is still always better to compare lenders and their rates, and often their policies too. Most mortgage lenders try to customize policies to suit the needs of their customers, and this can only be done if you meet with many lenders and compare rates.
With an online mortgage, all or many of the steps in the lending process can be completed electronically, whether through an app or online portal. These steps might include:
- Preapproval or prequalification
- Application and document upload
- Loan processing and underwriting
- Closing (sometimes called an ‘eClosing’)
Best Online Mortgage Lenders 2020
With everything that’s online, most mortgage lending companies have now established their digital presence, this means that they are facilitating their customers with online mortgage lending.
Here is a list of the best online mortgage lenders of 2020:
|Mortgage Lender||Loan Features||Required Credit Score||Average days to close Loan||Best For|
|Quicken Loans||-A custom fixed-interest loan term that can range anywhere from 8 to 29 years and can help you meet your financial goals.||580||30||Overall|
|New American Funding
|New American Funding offers the following mortgage types and loan options:
-30-year fixed-rate mortgage
-15-year fixed-rate mortgage
-I CAN mortgage
|-Quick, easy and customizable loans
-This not only saves you time but allows you to get pre-approved in as little as 8 minutes.
|-Fill out one simple form: An easy-to-fill-out form, your information is also completely protected.
-You get personalized rates: Credible offers real rates (not ranges) from several lenders in just 2 minutes.
Choose your lender: You can tap into Credible’s client success team to help you out.
|620||28 – 32||Low Rates
|-Its online application process is a great way to get prequalified.
-SunTrust offers stellar customer service, competitive rates and loan options. -SunTrust can offer you the best of both worlds if you want to work with a reputable bank to get your mortgage.
|620||60||Traditional Bank Experience
|-Quotes take as little as a few moments, and you can receive verified pre approval in 24 hours.
-Better is a great option if you’re looking for a quick process and want to cut out the fees. -Unlike most lenders, Better does not charge any commission or origination fees.
Note: Sample data has been extracted online, courtesy of Benzinga
Mortgage Pre Approval Checklist
A mortgage pre approval process may sound like a long time consuming one, but if you have all documents ready and at your disposal, the process is a lot simpler.
Here is a simple checklist to get you started. It starts with filling out an application, every borrower must fill in all the important information there is. Essentially, a mortgage application consists of eight major sections:
- Type of Mortgage and Terms of the Loan
- Property Information and Purpose of the Loan
- Borrower Information
- Employment Information
- Monthly Income and Combined Housing Expense Information
- Assets and Liabilities
- Details of the Transaction
After you fill in this application, the next step is to provide all the required documents to process further with the scenario. Here is a potential list of all the documents you will need to provide to get the pre approval:
- 60 days of bank statement
- 30 days of pay stubs
- W-2 tax returns from the previous two years
- Schedule K-1 (Form 1065) for self-employed borrowers
- Income tax returns
- Asset account statements (retirement savings, stocks, bonds, mutual funds, etc.)
- Driver’s license or U.S. passport
- Divorce papers (to use alimony or child support as qualifying income)
- Gift letter (if funding your down payment with a financial gift from a relative)
Once all of this is done, the loan officer is required by law to send a proper documented letter which agrees to the completion of the process. This will include all of the information like the loan you can borrow, how much monthly payments are to be made, an outline of the rules and regulations with the mortgage etc.
How to get Preapproved for a Home Loan?
Even when you’re only just planning to move out, mortgage pre approval must be somewhere in your mind. And you must be thinking about the process a lot, as to how to get preapproved for a home loan?
Here are the steps that would ease down your thought process and give you a clear understanding of what needs to be done.
We have discussed a lot about the importance of a high credit score; and for a mortgage pre approval, having a good credit score is absolutely essential. Having a high credit score will also help you get a competitive interest rate, so you’re likely to qualify for better rates with a score of 620 or more. Anything less than that will shrink your chances of pre approval as well as will get you very high interest rates.
Check your Credit History and Documents
Even though this is part of the checklist that the mortgage lender will specifically provide to you, you need to make sure all your documents are valid, authentic and up-to-date. Even one missing document will slow down the process and you might even miss your chance at getting competitive rates.
Calculate your DTI
A DTI, or debt-to-income ratio basically tells you how much debt you owe against your annual or monthly income. Of course, the DTI ratio should be very low, or lower than 43%. You can do it via any online calculator which would give you a fair estimate of what numbers you’re looking at.
Sticking with the first mortgage lender that you come across is not the best idea. Shop around for other lenders, online and in-house to get the best policies as well as better rates. When you contact more than one lender for requirements, you will know what the current mortgage rates are and what you can do.
How far in advance should I get pre approved for a Mortgage?
There is no time limit or a hard and fast rule about this, but most experts advise that you should apply for pre approval before you even start looking for a home. This is because you will know exactly what type of house you can afford to buy.
Sometimes people find a house they love, and it often exceeds their pre approval budget and they have to start looking for a cheaper option again (although it may not be necessary- you’ll soon know why). So having pre approval before looking for a house saves you from the disappointment and heartbreak of letting go of the house you really loved.
How long does it take to get Preapproved for a Mortgage?
Typically it takes somewhere between one to three days if you have all your documents ready. The loan officer only has to go through the documents, verify the information and issue you a letter.
However, debts or extensive credit information could slow down the process and stretch it to a week even. It is always advisable for people to have all their recent documents and papers ready before they apply for mortgage. This way getting a preapproval on mortgage is easier and less time consuming.
How long does Mortgage Pre Approval last?
Once you’ve gotten the mortgage pre approval letter, you have to be mindful of the expiry date too. Typically a mortgage pre approval lasts somewhere between 60 to 90 days. There are times when people’s preapproval letter actually expires, what to do then?
In such a scenario, you can request for another letter. But this time you will have to provide all your credit information and documents again because in these 2-3 months a lot of information could have changed. Provided that nothing changed over the course of these months, getting another preapproval letter will not be hard or time consuming.
Can you buy a house for more than your Pre Approval?
As a buyer, this is rather a very common practice. Often at times people love a house they want to buy but the amount they’ve been preapproved for is less than the house. So is it possible to buy a house which costs more than your pre approval?
The easy answer to this question is YES, you can buy a house for than your pre approval.
If that is the case with you, you should know that you will have to pay the difference out of your own pocket. If you have that kind of money, there is no reason why you should let go of your dream house.
In such a situation, buyers usually have three options to decide within:
- You could add cash to your down payment to cover the difference between your loan amount and the purchase price, if you can afford to do so.
- You could find another home to purchase, one that is priced closer to your loan amount.
- You could ask your loan officer if you qualify for a larger mortgage size, to get you closer to the purchase price of the house you want.
Whatever you decide will highly depend on your budget and what the best option for you is. If you’re still unsure, you could always speak to your lender and tell them about your situation and see if there are other, easier ways to get around the situation.
Pre Approval Mortgage Calculator
Before you even dive into the mortgage market looking for lenders, it is better to do a bit of homework on your own. To do this there are plenty of online preapproval mortgage calculators available through which you can get an estimate of how much loan you can afford and for how long you will have to pay monthly.
Here is a list of information that is needed for the calculator to run the algorithm, and you will have to:
- Enter your annual income before taxes.
- Enter the term of the mortgage you’re considering.
- Enter the interest rate for your mortgage type or use today’s mortgage rate.
- Select your credit score range.
- Tell us about your employment status.
- Tell us if you have a down payment.
- Tell us about past foreclosures or bankruptcy.
- Enter your monthly recurring debt payments.
What to do if you have a Bad Credit Score?
A subprime loan is a type of loan given out to people, especially borrowers with low credit. Many mortgage lenders reject people that have low credit ratings, because of their potential inability to repay the loan. This is also why the interest rate is relatively higher for such loans.
There is a prime interest rate that is set for prime buyers with a reasonable credit rating, currently the prime interest rate is 3.25%, but the subprime interest rate is always higher. This is due to the risk of the low-credit borrower to end up defaulting on the loan altogether.
FHA loans, as opposed to conventional loans, are very popular in the mortgage market. They are backed by the federal government, meaning the government gives lenders some guarantee on the loan, making it easier for lenders to trust the borrower.
The lender or banks who give out these mortgages are backed by FHA, which is why they have a downpayment as low as 3.5%. This is what gives lenders an edge even if the borrower defaults on the loan.
As compared to a conventional loan, the interest rates of FHA loans are relatively low because of their backing from the FHA. The interest rate today is 2.81% as compared to the interest rate of conventional loans which is 2.99%.
Essentially, there are 5 types of FHA loans:
|FHA LOAN TYPE||WHAT IT IS|
|Traditional Mortgage||A mortgage used to finance a primary residence|
|A reverse mortgage that allows homeowners aged 62+ to exchange home equity for cash|
|A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills|
|A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills|
|Section 245(a) Loan||A Graduated Payment Mortgage (GPM) with lower initial monthly payments that gradually increase (used when income is expected to rise), and a Growing Equity Mortgage (GEM) where scheduled increases in monthly principal payments result in shorter loan terms.
Even if you’re not a high-risk borrower on your own fault, there are chances that you default on these loans even because of higher interest rates or other reasons. Here’s how you can avoid getting to that stage of default:
- Budget your income to include the potential loan payment.
- Check your credit score and fix errors in your credit history.
- Make timely payments each month to improve your credit rating.
- Shop around for alternative lenders.
- Consider asking someone with strong credit and income to cosign on the loan.
- Set a reminder at least 3-4 days prior to the due date so that you don’t forget paying, and if you’re short of money, you have time to ask from your friends or family.
How to get pre approved for a home loan is not a time consuming process, only if all documents are provided and the application is filled. Please note that it is legally and morally required to be 100% truthful while filling out the application, any information that is fabricated or misleading will cancel the whole pre approval process for you. With that said, provide all supporting documents with your application to make verification easier for your case.
A pre approval is NOT a guarantee that you will get a loan for your house, it only gives peace of mind to loan lenders that you’re a serious buyer and can actually afford the property. Shop around to fetch the best mortgage deals and look around for online lenders too.