What Do You Need to Get Pre Approved For a Mortgage?
If you’re in the market for a home, getting pre approved for a mortgage is an excellent place to begin. It allows you to shop more intelligently and make stronger offers on properties.
During the mortgage preapproval process, lenders assess your credit score, employment history and income. They also take into account your debt-to-income ratio (DTI), which measures how much of your earnings go toward paying off debt obligations.
Credit Score
A credit score is a number that lenders use to assess your credit risk and decide if you qualify for credit. It ranges from 300 to 850 and is calculated based on information in your report. The higher your score, the easier it will be for you to obtain loans with competitive terms.
Most lenders use FICO scores when making decisions about whether to lend you money. These are based on your credit history and reports from the three major credit bureaus – Experian, Equifax and TransUnion.
Good credit makes lenders more likely to grant you a mortgage and approve your loan at lower interest rates. To improve your score, make timely payments and keep balances low.
Your credit score is the result of several factors, such as your payment history, length of credit history and usage patterns. It also takes into account your credit mix – that is, the percentage of revolving accounts you have and how much of your available credit limit you use each month.
Your credit history can help boost your credit score, as it demonstrates to lenders that you have experience with various forms of credit. Furthermore, having a long credit history demonstrates responsibility when managing debts responsibly.
Lenders also take into account your debt-to-income ratio, which is the amount of debt owed compared to your annual income. This includes housing expenses, auto and student loan payments.
You may be asked for documentation of your income, assets and debts. This could range from bank statements to pay stubs and tax returns.
Preapproval for a mortgage can help you focus your search and provide an indication of the price range of homes within reach. It also gives you peace of mind to move forward with the home buying process.
Be aware that this will temporarily lower your credit score by five points; however, don’t fret too much over it as your score plays an integral role in loan approval and can take months to improve if you have poor credit.
Employment History
Your employment history is an integral component of your mortgage application. Lenders want to verify that you’re secure in your current job and earning a steady income so they can grant you permission for the loan.
Your former employer can be an excellent source of information about your work history, so it’s worth reaching out to them to discover what type of job you had and for how long. You may also look back at past tax records to identify different jobs during different years, or inquire with your state’s unemployment agency or social security administration for a work history report.
Lenders typically require at least two years of employment history in order to approve your loan; however, this may be waived if you have been employed at the same company for some time or are transitioning into a similar field.
If you’ve recently changed jobs, it may be beneficial to compose a letter outlining the reasons for the switch. Doing this will enable your lender to gain insight into why the change was made and how you plan to utilize the skills gained from the previous job.
In similar situations, if you’ve lost a job or had your business reorganized, you can use the same letter to explain what occurred and how it impacted your finances. Doing this helps avoid rejection from potential clients.
Furthermore, you can provide documentation regarding any employment gaps such as maternity leave or caring for an aging parent. Doing this helps your lender understand the circumstances and gives them assurance that approving your loan will be successful.
A trusted mortgage broker can offer guidance on how to document any gaps in employment and take steps that might improve your odds of approval with such a situation. We know the best lenders to approach for such scenarios, and can ensure that your application satisfies all mortgage underwriting criteria.
Income
When applying for a mortgage, your income is an essential factor. It determines how much you qualify for and the interest rate that will be charged on that loan.
Your income can come from a variety of sources, such as a full-time job and side hustle/contract work, gig work, investment accounts, government benefits, bonuses, commissions and cash gifts. Many lenders will accept multiple sources of income to increase qualifying earnings and ensure you have enough funds for purchasing a house.
However, it may take some time before your additional earnings have an impact on your mortgage application. Lenders want to ensure that your income is secure and reliable.
Lenders want to know if you have been earning a higher salary for more than a few months. Furthermore, they want to know if you’ve taken on new side jobs or career changes recently that could potentially result in lower income down the line.
Once approved, the lender will need to verify your income through paycheck stubs or other proof of employment from your employer. Furthermore, they may request a copy of your most recent W-2 form or last two years’ tax returns.
When applying for a mortgage, your income is used to calculate your debt-to-income ratio (DTI). This is the amount of monthly debt payments including auto loans, credit card debt and your new mortgage divided by gross monthly income. Ideally, your DTI should be lower than 28 percent.
A higher debt-to-income ratio (DTI) indicates you may owe more on your home payment each month than what your income allows, which raises a red flag for lenders. To combat this issue, try increasing your income or decreasing debt before applying for a mortgage.
Are you considering purchasing a home? Personal Capital can help determine how much you can afford and provide an estimate of what you may borrow. Plus, this tool helps manage debt and monitor spending habits.
Assets
Your assets can be an integral factor in your mortgage application. Lenders use them to determine how much you can afford to spend on a home and thus what loan amount you qualify for.
When applying for a mortgage, lenders require to see that you possess an abundance of liquid assets in your bank accounts. This demonstrates your capacity to save money and pay off the mortgage if circumstances suddenly turn against you and leave you with little or no income.
Assets may include cash, stocks and real estate. You can list these on your mortgage application to increase the likelihood of receiving a large loan amount.
Assets for businesses refer to any item with current or potential economic value that will generate a positive return on investment. They’re classified according to how quickly they can be converted into cash, whether they are tangible or intangible, and how a business utilizes them.
In addition to liquid assets, lenders also consider your fixed assets. These are items like machinery and intellectual property that won’t be consumed or sold anytime soon.
Lenders may take into account non-operating assets such as short-term investments and marketable securities when making a determination of a business’ long-term financial stability. These items could indicate that the firm is well positioned to take out additional loans or make payments in the future.
Lenders require proof that you have a good credit history and can manage any debts associated with your mortgage. This includes repaying previous loans and having a low debt-to-income ratio.
If you receive gift funds as part of the home-buying process, those should also be verified to guarantee they don’t become a loan that needs repayment in the future. To do this, provide both a gift letter and bank statement confirming their deposit into your account.
Before applying for a mortgage, it’s wise to consult with a certified financial planner or accountant. This will give you insight into what assets are necessary in order to obtain your desired loan amount, plus give you an opportunity to review your current financial situation with an expert who can suggest which steps need to be taken in order to prepare.
