If you want to buy a home but don’t have enough savings to make a cash purchase, you’ll need to secure financing. While it’s tempting to start your home buying journey and begin searching for your dream house, understanding how to get pre-approved for a mortgage is the ideal first step.
Mortgages can bridge the financial gap between what you’ve saved and the price of the home you want to buy.
Mortgage pre-approval will also let you know how much you’ll be eligible to receive while helping you to make a more attractive offer.
Is pre-approval required to buy a house?
Getting preapproved for a mortgage loan isn’t technically required to buy a house. However, pre-approval will give you a much more accurate estimate of how much you’ll likely qualify to borrow.
This gives you a price range for when you’re house hunting.
Getting your offer accepted on the home you want will be much more challenging without a mortgage preapproval letter.
Prepare for pre-approval
Start by gathering information about your income and your expenses. Once you have that information, you can use a mortgage calculator to give you a rough estimate of the home price you can afford.
Once approved, you’ll receive your pre-approval letter to include in your offer. Some sellers will only accept offers from a buyer with a mortgage pre-approval letter.
The steps to mortgage pre-approval
Talk to multiple mortgage lenders before you get pre-approved to ensure that you get the best possible mortgage scenario for you and your needs.
Consider reaching out to various lenders, such as local mortgage lenders, credit unions, and banks to compare the terms they offer.
Mortgage prequalification is an informal process that you can complete with multiple lenders before choosing,allowing you to see which one will approve you for the best mortgage loan. Prequalification is often as simple as answering a few questions online or over the phone.
Credit
Mortgage pre-approval starts with your credit. Mortgage lenders will consider both your credit history and score when you apply for a loan.
While some mortgage products, such as the VA loan, don’t have minimum credit score requirements, you won’t be able to get mortgage pre-approval without a credit check or review of your credit history.
One of the best ways to prepare for the mortgage pre-approval process is to check your credit report and credit score.
Credit scores fall between 300 and 850. The higher your score, the better your chances of mortgage approval. Higher credit scores also play a prominent role in qualifying for lower mortgage interest rates.
You can get a free copy of your report annually from each of the three major credit bureaus.
If you notice any mistakes or have questions about something on your report, you can contact the credit reporting agency directly to get it fixed or update your information.
Careful review of your credit report is essential.
In their 2020 Annual Report, the Bureau of Consumer Financial Protection noted that almost 70% of consumers found at least one error or omission on their credit report.
Debt-to-income ratio
Lenders use your debt-to-income (DTI) ratio to evaluate your ability to repay a mortgage loan.
Your DTI is calculated by dividing monthly expenses by monthly income. Most lenders require a DTI of no more than 43%, while some lenders allow a maximum DTI of only 36%.
To calculate your DTI, divide your monthly expenses by your gross monthly income.
For example, if your average monthly income is $4,000 and your monthly expenses are $1,500, your DTI would be 37.5%
($1,500 ÷ $4,000 = 0.375 or 37.5%).
Down payment
In addition to building more equity in your new home, a larger down payment could mean a lower interest rate.
For down payments on conventional mortgages totaling less than 20%, borrowers typically have to pay private mortgage insurance (PMI).
PMI usually costs borrowers an additional 1% of the outstanding mortgage balance annually.
Not all mortgage loans require a 20% down payment, however.
For example, FHA loans (guaranteed by the Federal Housing Administration) offer a 3.5% down payment option, and VA loans (Department of Veterans Affairs) have a zero down payment option for eligible service members.
Use a mortgage calculator to see how different down payment amounts could change your monthly mortgage payment.
Down payment assistance
If you’re struggling to come up with a down payment, Austin Capital Mortgage has a down payment assistance program that can help.
Buyers with a credit score of at least 660 could qualify for the program, which features the following benefits:
- No income limits
- Do NOT need to be a first time buyer
- Co signers ARE allowed
- Loan limit follows FHA guidelines
Navigating the pre-appoval process as a first-time buyer
Mortgage pre-approval for first-time homebuyers or repeat homebuyers is the same.
You’ll provide information about your finances, income, debts, and assets, as well as where you are looking to buy.
While each lender’s pre-approval process will differ, most will want to run a credit check. Your lender may need additional supporting documents, such as:
- Pay stubs or W-2 statements
- Personal tax returns
- Bank accounts
- Alimony or child support statements
Once your information is verified, and the lender approves your application, you’ll receive your mortgage pre-approval letter.
It’s important not to make any significant financial changes between your mortgage pre-approval and finalizing your mortgage.
Your pre-approval was based on specific financial information. Major changes, like applying for new credit—such as a credit card or car loan—or changing jobs can negatively impact your mortgage approval.
Finalizing the application process
Once you find the home that you want to purchase, and the seller accepts your offer, it’s time to finalize your mortgage application.
At this point, you’ll complete the final parts of your mortgage application, and your lender may need additional information.
The speed of the process will partly depend on how quickly you submit the documents that your lender asks for.
This is also when you’ll arrange for a home inspection and appraisal if necessary. Lastly, the underwriter evaluates your application and gives the official go-ahead.
You’ll receive the “Closing Disclosure” document three business days before your closing date.
Review it carefully—it contains the details about your loan, including the terms of your mortgage and your interest rate—and compare it to your Loan Estimate to ensure there are no mistakes or omissions.
You’ll do your final walkthrough of the house and pay any closing fees at closing. Common closing fees can include:
- Attorney fees
- Real estate agent fees
- Loan origination fees
- Home appraisal fees
- Underwriting fees
Get pre-approved for a mortgage with Austin Capital Mortgage
Turning your dream home into a home-sweet-home begins with a mortgage pre-preapproval.
At Austin Capital Mortgage, we want to make the mortgage process easier.
Get in touch with our local loan specialists today.