How to prepare to get a mortgage preapproval
Many homebuyers think that finding their dream home is the most difficult part of the homebuying process. However, more focus needs to be placed on getting preapproved for a mortgage.
In addition to helping new buyers understand how much home they can afford, mortgage preapproval can also show sellers that you are serious about purchasing a property. The following guide can help potential buyers prepare to get a mortgage preapproval.
The difference between preapproval and prequalification
The terms preapproval and prequalification are sometimes used interchangeably. However, there are three key differences between these terms.
1. Prequalification is an estimate of what a buyer can borrow. A preapproval is a specific amount a buyer can borrow based on their financial situation.
2. Prequalification allows buyers to self-report information such as assets and credit score. Preapproval requires thorough documentation of a buyer’s finances.
3. Prequalification does not require a credit check; preapproval requires a credit check.
Requirements for preapproval
Potential buyers need five things to get preapproved for a mortgage. Preparing these documents in advance – and being open and cooperative with your mortgage lender – will make the preapproval process go smoothly.
1. Proof of income. Buyers must produce proof of income as part of the preapproval process. This can be W-2 statements for the past two years, recent pay stubs, or two years of recent tax returns.
2. Verification of employment. In addition to verifying income, lenders will want to verify employment. This can be done through showing six months of pay stubs or by receiving a letter of employment verification from a borrower’s employer. Self-employed borrowers will need to prove the stability of their income; this often requires showing two years of tax returns as proof of earnings.
3. Proof of assets. Lenders will also require proof of assets; this ensures that the buyers have the funds for a down payment, closing costs, and additional cash reserves. Down payment requirements vary by type of loan; while most traditional loans require at least 20% of the purchase price as a down payment, VA and FICO loans have different down payment requirements.
4. Good credit scores. Credit score requirements vary between lenders and differ based on the type of loan. Most lenders require a score of at least 620, while those with scores of 760 or higher are able to qualify for the best rates. Those with lower credit scores may require larger down payments or qualify for higher interest rates.
5. Other documents. In addition to the necessary financial statements, borrowers will need to produce other documents for the preapproval process. This can include a drivers license, passport, or Social Security card.