What You Need to Know About the Pre-Approval Process

If you’re ready to make your dream of owning a home a reality, you’ve probably already heard that you should consider getting pre-qualified or getting pre-approved for a mortgage. Getting pre-qualified and getting pre-approved is different, but both are equally important steps in the home loan process. Knowing what certain terms mean and how they might help you will be a big advantage for you.

Getting pre-qualified is the baby step in the home buying process that gives you an idea of how large a loan you’ll likely qualify for. Getting pre-qualified can give you a sense of your financial readiness and introduce you to different mortgage options for first-time homebuyers who are just browsing but aren’t ready to purchase yet. To learn more about the difference between getting pre-qualified and getting pre-approved, click here.

A mortgage pre-approval is the official first step as you begin the process of purchasing your next dream home. It helps you understand how much home you can afford and shows your real estate agent and the sellers that you’re serious about purchasing a home. Think of a pre-approval as your finance’s wellness check-up. Before lenders decide to pre-approve you for a mortgage, they will look at several key factors:

• Your credit history
• Credit score
• Debt-to-income ratio
• Employment history
• Income
• Assets and liabilities

What Determines Pre-Approval?

As lenders evaluate your financial profile for a mortgage pre-approval, their goal is to determine your ability to repay a loan. They look at your income and employment history, your credit history and score, your debt-to-income ratio, your down payment, and the loan-to-value ratio.

Income & Employment History

Lenders need to ensure that you have stable employment and an adequate income to allow you to take on a mortgage. Your employment will be verified, and your salary will be evaluated to make sure you make enough money to cover your mortgage payment and related monthly housing expenses.

Credit History & Score

Your credit report will be pulled to ensure that you pay bills on time and manage your debt responsibly. Lenders will analyze your payment history, the number and type of credit lines you have open, and the length of time you’ve had those accounts. One of the most important factors is how much of your available credit you use (known as credit utilization). Maintaining a credit utilization rate below 30% helps boost your credit score and shows lenders that you pay your bills and manage debt wisely. All of these items account for your credit scores, which is a key factor in your pre-approval and what interest rate you can get.

Debt-To-Income Ratio (DTI)

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Your debt-to-income ratio measures how much you owe in payments each month relative to your monthly income. Lenders evaluate your DTI to help determine whether you can afford to take on another payment. To calculate your DTI, add up all your monthly bills (including things like rent, credit card payments, and other monthly loan payments) and divide the total by your gross monthly income. The lower your DTI, the less risky you are to lenders.

Loan-To-Value Ratio (LTV)

Another key metric lenders use to evaluate your qualification for a mortgage is your loan-to-value ratio, which is the loan amount divided by the home’s value. A property appraisal determines the property’s value, which could be lower or higher than the asking price. Your down payment amount is a factor in the LTV ratio. The higher your down payment, the lower your loan amount and, as a result, the lower your LTV ratio. If you put down less than 20% percent, you might be required to pay for private mortgage insurance (PMI). It’s a type of insurance coverage that protects lenders in the event you fail to repay your mortgage. To lower your LTV ratio, you either need to put more money down or buy a less expensive house.

When Should You Get Pre-Approved?

Mortgage pre-approvals are typically valid for 90 days or until something in your financial status changes. It’s best to go through the process as soon as you decide you want to purchase a home because it will help you determine how much you need to save and what adjustments may need to be made to your budget. If your pre-approval expires, no need to stress; you’ll just need to update your documentation.

Pre-Approval Decisions

After reviewing your mortgage application, a lender will usually give you one of three decisions: pre-approved, denied outright, or pre-approved with conditions. If you’ve been pre-approved with conditions, you may need to provide extra documentation to remove those conditions. If you are denied outright, the lender should explain exactly why and provide you with resources on how to best tackle the problems. Once you know what you need to address, you can take the time and effort to improve your credit and financial health to get a better mortgage deal when you’re ready to embark on your home search. That’s why going through the process early has its advantages. Doing so can ensure a smooth loan process and will help to get you the best rate available.

The Pre-Approval Letter

Once you’re pre-approved, your lender will provide you with a pre-approval letter on official letterhead. This official document indicates to sellers that you’re a serious buyer and verifies that you have the financial means to make good on an offer to purchase their home. Most sellers expect buyers to have a pre-approval letter and will be more willing to negotiate with those who prove that they can obtain financing. Pre-approval letters typically include the purchase price, loan program, interest rate, loan amount, down payment amount, expiration date, and the property address. When you’re ready to make an offer, you can choose the lender that offers you the best rate and terms for your needs.  Keep in mind, getting a pre-approval doesn’t guarantee that a lender will approve you for a mortgage, either, especially if your financial, employment, and income status change during the time between pre-approval and underwriting.

Final Steps

Whether you’re 100% ready to purchase a home or if you’re just starting to think about homeownership, the pre-approval process can help you get your credit and finances in better shape for when the time is right. Keep in mind that a mortgage pre-approval doesn’t necessarily guarantee you a loan. Pre-approval letters are conditional on your financial and employment information being consistent before your loan closes.

At BluPrint, we’re here to make the home loan process simple and painless. We pride ourselves in our transparency, experience, local expertise, and out-of-the-box solutions that will get you into your new home or help you save money on your existing loans. Get in touch with one of our local experts here.