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For many prospective buyers, a house-hunting journey begins at an open house. Of course, there is nothing like falling in love with a property at first sight and imagining your family growing in your dream home! And yet, if you are serious about your home search, the first step is to get pre-approved for a mortgage.
A pre-approval can help you be clear on how much you can afford and, in today’s nationwide seller’s market, snatch the right property as it becomes available. But before heading to the lender’s office, learn how to increase your chances of getting pre-approved below!
Assess Your Income, Budget, and Debt Obligations
Pre-approval applications are assessed on a case-by-case basis, but all lenders will evaluate some specific factors, which include:
- - Your debt-to-income (DTI) ratio, or the portion of your monthly income that is used to repay outstanding debt - such as student loans, auto loans, and credit card balances.
- - Your loan-to-value (LTV) ratio, or the percentage of the property’s value you’ll need to borrow. To access better terms, you’ll need a minimum downpayment of 20% and not borrow more than 80% of the property’s value.
- - Your credit history and income, based on your credit score and household income.
If you are looking to start a pre-approval process, make sure to assess your current financial situation based on these factors. And, before you book your next in-person or virtual house viewing, submit your W-2 wage statements, pay stubs, and other proof of income to your lender for review.
Build a Robust Employment History
For lenders, the aim of a pre-approval process is to understand how risky a borrower is. Building a robust employment history and maintaining a stable job can help you reassure your lender that you have a reliable financial situation and are able to cover your monthly repayments. In turn, this can minimize the transaction's risk and give you access to the mortgage terms you are after.
If you are self-employed, it’s also possible to secure convenient mortgage rates and terms, but the process might involve additional paperwork to prove your income stability. In any case, be ready with pay stubs, contracts, tax returns, and your employer’s details for your lender’s verification.
Provide the Lender With Proof of Assets
Aside from your income and employment proof, you will also need to produce several bank and investment account statements. The lender will use this information to check that you have enough funds to cover your mortgage’s monthly payments, as well as interests and closing costs.
Additionally, unless you can access insured products such as Veterans Affairs (VA) loans or you are happy to pay a private insurance premium, you will need a downpayment of 20% of the house price. To get pre-approved, you might need to show that you have adequate funds to cover this upfront cost.
- * Extra tip - if you are using gifted money for your downpayment, you will need to provide a gift letter and show proof that the transaction took place.
Work On Improving Your Credit Score
Your credit score is nothing more than a snapshot of your credit history and financial situation. And yet, this three-digit figure can make a difference in the kind of mortgage terms and loans you’ll be able to secure!
According to Credit Reporting Agency Experian, generally, the minimum credit score needed to secure a mortgage is 620. However, just because you can get pre-approved with this credit score, it doesn't mean that you should apply for a mortgage immediately.
Indeed, if your FICO score is in the 620-639 bracket, you’ll be offered high interest rates of 4.5% and above. So, applying for a mortgage with such a score can help you take a step up the property ladder, but it can negatively affect your finances for the next 20-30 years.
Instead, spend some time clearing up your credit history and boosting your FICO score. Lenders are prepared to offer lower interest rates of 3% or below if your score is 760 or higher - and a higher score can help you get pre-approved for greater loans!
Find a Reputable Mortgage Lender Who Offers Quick Pre-Approvals
Not all mortgage lenders are created equal, and finding the one that works better for your needs is crucial to secure a pre-approval when you need it the most. Providers such as SoFi understand the importance of a timely pre-approval - especially in a real estate market that is today dominated by high house prices, low inventory, and fierce competition.
While most pre-approvals are valid for 60-to-90 days and take 10 days to come through, some lenders can complete the credit verification process in as little as 1-3 days. Make sure to shop around for the right provider for your needs.
- * Extra tip - pre-approvals come with a hard credit check and applying for multiple ones can affect your credit score. So choose wisely!
Be Ready To Provide Additional Documents
Most pre-approval processes today are completed in a timely manner, and you are likely to receive an answer within a few days of submitting your documents. However, depending on your financial situation, your mortgage lender might need to carry out a range of checks.
If you are in a rush of getting a pre-approval, make sure to be ready with additional documents and supporting evidence. After all, the more cooperative you are, the faster your application will be processed!