So you decided you're ready to become a homeowner, congratulations! The home-buying journey, while exhilarating, can also be overwhelming. Fortunately, our team at Wilkes Mortgage Group is ready to guide you through it all. The very first step in any home-buying endeavor is getting preapproved for a mortgage. Armed with the right knowledge and preparation, you can confidently tackle this crucial stage on your path to finding your dream home. In today's blog, we'll guide you through the ins and outs of the mortgage pre-approval process, equipping you with valuable insights and expert tips to help you sail through and secure your ideal home.
What is a mortgage pre-approval?
Before you hit takeoff on the exciting adventure of buying a home, we need to fully understand the mortgage pre-approval. This preliminary step in the home-buying process involves assessing your financial situation to determine how much money a lender is willing to loan you. Having a mortgage pre-approval, gives you purchasing power, enabling you to make informed decisions when searching for your dream home. It also shows sellers what you have to offer.
Remember, there is a difference between a mortgage prequalification and a preapproval. Getting prequalified for a mortgage is based on a casual conversation about your credit scores, earnings, monthly debt payments, and the funds you have available for a down payment and closing costs. The lender relies on what you tell them without financial documents to back it up and, in some cases, without pulling a credit report. Getting pre-approved for a mortgage involves a deeper dive into all the information you disclosed on your loan application verified by submitting documents. Some of these documents may include paystubs, W-2s, and bank statements. A mortgage preapproval is usually for consumers committed to buying a home.
Step 1: Find a Lender
Research and select a reputable mortgage lender or mortgage broker to work with. You can choose from banks, credit unions, online lenders, or mortgage companies. Not all lenders are the same, and exploring your options is crucial to finding the best mortgage terms for your needs. Compare interest rates, loan terms, and fees to determine which lender offers the most favorable terms. You also want a lender that will understand your situation and navigate the homebuying process confidently for you. This is a huge part of our process. No two home-buyers are the same, so no two loans will be the same either. We offer a complete white glove service to each of our clients. Finally, familiarize yourself with various loan programs, such as conventional loans, FHA loans, VA loans (read more about that over at our other website, californiamilitaryloans.com), or USDA loans, to identify the one that aligns with your financial situation and goals.
Step 2: Gather Your Financial Information
Time to take a look at your financial health! Lenders will usually look at many factors in the preapproval process. Lenders typically require proof of income, such as pay stubs, W-2 forms, or tax returns. They also assess your creditworthiness, so have a copy of your credit report and review it for any errors or discrepancies. You'll also want to gather bank statements, investment account statements, and other relevant financial documents that provide a comprehensive overview of your financial health. Being organized and having these documents readily available will expedite the pre-approval process. Here's a brief overview of the most important mortgage preapproval factors:
Credit score. Your credit score is key in a mortgage preapproval. The lender will pull your credit report to check your credit score and history. A higher credit score generally leads to better loan terms. Make sure that leading up to applying you are paying everything on time and keeping your credit balances low, if not at 30% of the total amount you can borrow. For example, if you have $10,000 worth of credit, don't charge more than $3,000 in any given time period.
Debt-to-income ratio. Your debt-to-income (DTI) ratio is as important as your credit score. Lenders will also take a look at this by dividing your total debt by your pretax income and prefer that the result is no more than 43%. Some government programs may allow a DTI ratio of up to 50% with high credit scores or extra mortgage reserves. The bottom line: You won't be approved if your DTI ratio is too high, even if you have a perfect credit score.
Down payment and closing costs funds. Most loan programs require a down payment of at least 3%. You'll also need to budget 2% to 6% of your loan amount to pay closing costs.
Income and employment. Lenders prefer a two-year employment history of receiving a full-time salary or hourly earnings. This includes averaging commission, bonus, overtime, or self-employment income.
Step 3: Calculate Your Budget
Time to budget! Determining your budget is a key part of the mortgage pre-approval process. Analyze your income, expenses, and debts to understand how much you can comfortably afford to spend on monthly mortgage payments. You also need to consider other expenses associated with homeownership, such as property taxes, insurance, maintenance costs, and any home improvement projects you want to take on. Utilize online mortgage calculators to estimate your monthly payments based on different loan terms and interest rates. At Wilkes Mortgage Group we're happy to help you calculate your monthly budget so you can make the best decision for your financial situation! Having a realistic budget in mind will help you focus your home search and avoid overextending yourself financially.
Step 4: Fill Out Your Application
Time to officially fill out your application! Once you've gathered your documentation, calculated your budget, and researched lenders, it's time to initiate the pre-approval process. Be prepared to answer questions about your employment history, income sources, and any outstanding debts. Remember, the more accurate and comprehensive your information, the smoother the pre-approval process will be! The lender will review your application, pull a credit report and, if all goes well, you'll receive a written mortgage preapproval letter you can submit with offers you make to purchase a home!
Now you're probably wondering what if I don't get approved? The most common reasons for a home loan denial are low credit scores or high DTI ratios. Once you've learned the reason for the loan denial, there are three things you can do:
- Reduce your DTI ratio. Refinance your car, pay off credit cards, or ask a relative to cosign on the loan with you.
- Improve your credit score. Many mortgage lenders offer credit repair options.
- Try an alternative mortgage approval option. Mortgage brokers or mortgage lenders may offer non-qualified mortgage (non-QM) or even hard money loans if your credit history is too challenging for standard loan programs, or your income can't be verified with tax returns.
At Wilkes Mortgage Group we're equipped with a knowledgeable team and resources to help you navigate the preapproval process like a pro! Visit https://wilkesmortgagegroup.com/ to take the first step to getting your FREE pre-approval letter!