Obtaining pre-approval for a mortgage loan helps you focus on finding a home within your budget. Being pre-approved for a mortgage also helps move the home buying process along because sellers don't have to be as concerned about whether you will qualify for a loan. Pre-approval depends on many factors, such as your employment history, current financial situation and credit history. While pre-approval does not typically include final interest rates or the type of mortgage you qualify for, it does provide some peace of mind when house hunting. However, a pre-approval is not an absolute guarantee -- even with pre-approval, you may still be denied a mortgage for a variety of reasons, such as a negative credit item that does not show up at first, a change in your job situation or if the appraisal of the house you want to buy is less than the amount you want to borrow to purchase it.
Contact mortgage lenders to ask about their mortgage pre-approval process. Most lenders require you to fill out a mortgage application to learn more about your financial stability and employment. Lenders need to verify financial information, such as income, savings, debt and your employment history to determine if you qualify for pre-approval for a mortgage. Provide copies of tax returns for the past two years, W-2 forms for the past two years, bank statements for the past six months and other financial documents requested by lenders.
Reduce credit card, car and student loan debt before applying for pre-approval for a mortgage. Your income-to-debt ratio (how much you owe as a percentage of how much you earn) is one way lenders determine risk when lending money. Make larger monthly payments if possible to reduce your debt.
Increase your savings. Most lenders require a down payment of at least 3.5 percent for FHA loans and 5 percent to 20 percent for other types of loans. Having a healthy balance in your savings account increases your chances for mortgage pre-approval. Spend less each month or take on extra work to increase savings.
Maintain a solid employment history. The longer you stay with one employer, the more stable you will appear to lenders. Apply for mortgage pre-approval after working for the same employer for at least six months.
Increase your credit score. Avoid taking out new loans for cars, computers and other high ticket items until you purchase a home and pay down existing debt. Lenders check credit reports and scores to determine risk. For mortgage pre-approval, you should have a credit score of at least 650. Those with credit scores of 750 or higher qualify for the best interest rates.
Items you will need
- Tax returns
- W-2 forms
- Bank statements
- Credit report
- Obtain a copy of your credit report before applying for mortgage pre-approval. Check the credit report to make sure all the information on the report is accurate. Submit changes to all three credit bureaus if you notice an error. You are entitled to one free credit report each year from each of the credit bureaus. Visit the Federal Trade Commission website for more information about obtaining free credit reports.
- Apply for mortgage pre-approval with at least three lenders to compare interest rates and maximum mortgage amounts.
- To avoid possible foreclosure on your home, do not take out a mortgage you can't afford, even if you are approved for a higher amount than you think you can afford.
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