5 Mortgage Pre-Approval Tips to Get You Into Your Dream Home
Buying a home to call your own is a common financial goal among most adults. Home-ownership represents different things to different people. For many, it offers a sound strategy for accumulating wealth, while setting a steady foundation for the future. Purchasing a home is not a simple task, however, as it requires some know-how in terms of borrowing effectively. With the average national price of a single-family home coming in at $341,200, a mortgage loan is usually necessary to make the home-ownership dream a reality.
Over the last several years, the landscape for securing a mortgage has shifted in favor of home-buyers. Despite that, the process of affordability and transparency can be complex. Mortgage lenders want to know that the risk they are taking on, with an often substantial loan, is warranted. Meaning they trust that you, as the borrower, will make every effort to repay your mortgage balance as agreed. To ensure home-buyers are an acceptable risk, many lenders suggest going through a mortgage pre-approval process. With a pre-approval for a mortgage, you know where you stand in terms of getting an affordable home loan.
A pre-approval will set you up well for the home-buying process. Before running to a lender to ask for one, you’ll need to take certain steps first. Taking these steps will ensure you are set up for success. Below are the five most crucial tips on getting a mortgage pre-approval from your lender (or Mortgage Broker) of choice. Following these 5 mortgage pre-approval tips will help get you into your dream home.
5 Mortgage Pre-Approval Tips – Tip 1:
Check Your Credit
Many prospective homeowners recognize the importance of having good credit when applying for a home loan. However, just as many avoid taking the proactive step of checking their credit first, before applying for a pre-approval. Your credit report and score tell a story about your financial past and present. Lenders rely heavily on that story to determine your eligibility for a new loan. If you are unsure of what your story may share, checking your credit is crucial.
You have an opportunity to check your credit through a number of resources. Some of the resources include a brief overview of what you owe. Others provide an in-depth look at your current and historical financial behaviors. Your best bet is to go directly to the source for the most up-to-date, accurate information. This means pulling your credit reports from each of the three credit bureaus: Equifax, Experian, and TransUnion. You can pull your credit for free, once per year, at annualcreditreport.com.
Once you have your credit reports, go through them with a fine-toothed comb. Credit reporting agencies are not perfect, and mistakes are often made. When you see errors on your credit report, it is necessary to work toward correcting them. Those errors should be corrected before submitting your mortgage pre-approval application. This step helps you avoid delays or, at worst, a decline due to inaccurate credit report entries.
5 Mortgage Pre-Approval Tips – Tip 2:
Have Savings Set Aside
Not all home purchases require a hefty down payment. (See these First Time Home Buyer Programs.) However, nearly all mortgage lenders want to know that you have done some proactive saving to prepare for home-ownership. Before asking for a mortgage pre-approval from your Mortgage Broker, it is essential to have some funds set aside. This shows you are serious about the prospect of owning a home. To determine the amount, think about your need for a down payment. This will be based on the type of loan you are planning to secure. Also, don’t forget there may be closing costs you are responsible for as the buyer. Those costs can range from 2 to 5% of the home’s purchase price. Have savings or investments set aside, as well as statements to back up the balance details. Have those ready to go for your lender before asking for a mortgage pre-approval.
5 Mortgage Pre-Approval Tips – Tip 3:
Don’t Rock the Financial Boat
Potential homeowners may not recognize the implications of making large – or small – financial moves. Especially the moves that happen right before applying for a home loan to obtain a mortgage pre-approval. However, the consequences can be dire.
The following financial moves:
- Changing employment
- Experiencing a decrease in income
- Moving money in and out of accounts
- Taking on significant amounts of new credit or debt right before (or during) the mortgage pre-approval process
Can make it difficult for mortgage lenders to know which direction is up. Lenders like stability, so it is necessary to keep things as steady as possible when going through the pre-approval process. If there is a need for a change that cannot be avoided, be sure to have documentation on hand. The lender will likely also want to see a letter of explanation, documenting the reason for the change.
5 Mortgage Pre-Approval Tips – Tip 4:
Know Your Budget
Buying a home requires borrowers to have a firm understanding of what they can and cannot afford each month in terms of the mortgage loan. This may be easy to determine based on income and expenses. Even so, sometimes potential homeowners overlook all the line items included in a monthly mortgage payment. Repaying your mortgage loan requires not only principal and interest, but also property taxes and homeowner’s insurance. Those all are typically included (escrowed) in your monthly payment.
Before applying for a pre-approval, run a few calculations that include these important extra costs. Utilizing a mortgage calculator will help accomplish this step. Having a realistic number in mind will give you the best chance of receiving a mortgage pre-approval.
5 Mortgage Pre-Approval Tips – Tip 5:
Pay Down Debt
As you prepare to apply for a mortgage, it is also beneficial to evaluate your monthly debt obligations each month. Mortgage lenders base approval, at least in part, on your debt-to-income ratio. Your debt-to-income ratio is the amount you owe each month to other creditors compared to your earned income. If your debt-to-income ratio is high, mortgage lenders may think twice about offering you a mortgage pre-approval.
Work toward paying down the debt you can before applying, so that your debt-to-income ratio is within an acceptable range. For most lenders, it’s ideal to not have more than 43% of your income promised to creditors. Preferably, that would also include your new monthly mortgage payment.
Getting to a smaller (or zero balance) on:
- Credit cards
- Auto loans
- Personal loans
- Student loans (can be an exception – feel free to contact us for more info)
Helps reduce your ratio, and it puts you in a prime position for a pre-approval.
Getting a pre-approval is an essential part of the home-buying process. You can set yourself up for success by following these 5 simple mortgage pre-approval tips, well before you apply for a mortgage pre-approval.
About the Author:
Christine Yaged is a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.
Disclaimer: This article, 5 Mortgage Pre-Approval Tips to Help You Qualify was written by Christine Yaged in her personal capacity. The views and opinions expressed in this article are the author’s own and do not necessarily reflect the views of MLS Mortgage Group.