Unlocking the door to homeownership often begins with a mortgage preapproval, a process that can be complex and occasionally misunderstood. This guide sheds light on the key factors that lenders consider and outlines the necessary steps for those aspiring to be preapproved.
Essential Requirements for Mortgage Preapproval
Distinguished from a casual mortgage pre-qualification, obtaining a preapproval demands more than just a conversation with a lender. Prospective homebuyers must furnish a comprehensive set of documents, including employment verification, financial records for checking, savings, and investments, and the submission of a credit report. The fundamental elements that lenders universally assess for mortgage preapproval are:
1. A minimum two-year employment history within the same job or field.
2. A credit score of 620 or higher in most cases.
3. A proven savings track record.
4. Documentation of financial assets.
5. Proof of a down payment ranging from 3% to 20% of the home price, contingent on the loan program.
6. An overall debt-to-income ratio of 43% or less.
The application process for mortgage preapproval is typically fee-free, though some lenders may seek reimbursement for the credit report fee.
Scrutiny of Job and Credit History
While the two-year employment history guideline allows for some flexibility, transitioning from a W-2 job to self-employment without a two-year track record is often a barrier in the mortgage approval process. A credit score of at least 620 is generally considered a prerequisite, yet the credit scores used for mortgages tend to be more stringent than the consumer credit FICO scores widely available. For mortgage credit scores, the middle score among the three major credit bureaus—TransUnion, Equifax, and Experian—holds greater significance, making it essential to understand the nuances of credit scoring.
In cases involving multiple borrowers, such as spouses or partners, the mortgage approval process relies on the middle score of the party with the lowest credit rating.
Assets and Down Payment
The ability to budget and save is indicative of financial discipline, a trait valued by lenders during the preapproval process. While gift money and bonuses are acceptable, documenting the source of such funds is crucial. Recognizing the imperfections of life, lenders emphasize the importance of providing detailed documentation to explain one’s financial ability to repay the mortgage.
Debt and Income Considerations
Lenders scrutinize the debt-to-income ratio, aiming for a back-end DTI of 43% or less, which includes the mortgage payment. This comprehensive evaluation encompasses monthly property taxes, homeowners’ insurance, credit card payments, student loans, and car payments. Although the 43% threshold is a general guideline, some flexibility exists. A higher debt-to-income ratio may be acceptable with compensating factors, such as a solid credit score and a substantial down payment.
Initiating the Mortgage Preapproval Process
Commencing the preapproval process well before embarking on a house hunt is advisable, as it allows prospective buyers to address any qualifying issues in advance. While preapprovals typically remain valid for 60 to 90 days, lenders may extend them if updated financial information is provided. Obtaining a mortgage preapproval provides the confidence needed to navigate the homebuying process successfully.
In conclusion, understanding the intricacies of mortgage preapproval is essential for aspiring homeowners, helping them navigate the journey to homeownership with confidence.
The article How to Know You’re Mortgage Preapproval Worthy originally appeared on NerdWallet.
