When you are pre-approved for a mortgage, the buyer starts the mortgage process by providing information on income, assets, credit, employment and required documentation to lenders. Then, lenders use that information combined with credit score and debt-to-income ratio, among other factors to help confirm approval. Once you have a pre-approval in your hand, the lender has told you that you qualify for a mortgage. When you’re home buying, that pre-approval will come in handy as it shows sellers you’re serious and will be able to afford to purchase the home from them.

If you are going to be buying a home, getting pre-approved is an important first step that better positions you to find the right home in your budget. Here is a quick look at what a pre-approval application is and what it means.

Why Get Pre Approved

Getting pre-approved gives you the maximum amount of mortgage you can qualify for. This will help you get a rough look at monthly payments so you can work out your budget once you find your new home. Getting pre-approved can also lock in an interest rate for up to 130 days, depending on your lender.

What Lenders Look At

Income

Mortgage lenders will require proof of your income over the last two years as well as current pay. With your application, you can provide pay stubs or tax returns to show proof.

Assets

A list of assets, such as a current home, vehicle, etc

Debt

Your current level of debt across any type of credit (credit card, LoCs, other loans)

What You Need to Provide

ID: Visual identification of who you are

Employment: Proof that you are currently employed with proof of salary, role, tax returns, etc

Proof of Finances: Ability to show that you can afford down payment and closing costs, such as providing bank statements or financial statements showing investments/account info

Other Assets: As stated above, other assets you own such as other homes, vehicles, boats

Debt: A list of all debt in your name or other financial obligations (ie child support)

Result

Once pre-approved, the number provided is the maximum that the lender will give you on a mortgage. It does not guarantee that you will get approved for a mortgage at that amount. The final mortgage approval is based on the value of the property and the size of your down payment.  Being pre-approved can help reign in the homes you look at to keep in a more realistic budget.

But, you must also remember that you will need to account for all closing costs and ongoing home maintenance. You shouldn’t put all your money into the home – look for something in a lower price range so you can have a financial cushion to fall back on.

Can I Be Refused once Pre-Approved?

Unfortunately, a pre-approval does not guarantee a final mortgage, so a lender could end up refusing you after the fact. Before the loan is approved, the property you purchase will have to meet standards and guidelines which vary from lender to lender.

If you end up in a situation where the lender does not give you final approval on your mortgage, you can work with them to find other options available, such as a lower amount, negotiating with a higher interest rate, providing a larger down payment, or getting a cosigner. 

Conclusion

Getting pre-approved before house hunting is a great way to narrow your search to homes in your price range, and also gives you a rough idea of how to budget your finances. If you are looking to get mortgage pre-approval, The Mills Team is an award-winning brokerage ready to help you find the perfect mortgage at the best rates for you.