How To Secure A Pre-Approval Letter
Updated: Sep 7, 2022
Ready to buy your home? It all starts with a pre-approval letter from a mortgage lender.
The first, and perhaps most important, step to buying a home is securing a pre-approval letter from a qualified lender. Whether you are looking for an FHA, USDA, Conventional, VA, or Jumbo loan, you will start out by getting pre-approved. This will help you understand what you qualify for and how much you can afford. This isn't as simple as applying for a credit card, so taking the time to learn what will be expected will help set you up for success.
Here is everything you need to know about being pre-approved for a mortgage!
Pre-Qualified vs. Pre-Approved
People tend to think that these words are interchangeable, but the reality is they represent two very different things.
Pre-Qualified: To become pre-qualified is relatively simple. You tell a lender about your income, your credit score, and oftentimes they ask what debts you carry (credit cards, car payments, student loans, etc). They will use that information to provide an estimated mortgage amount. This gives you a vague idea of what you can afford.
They do not check your credit score, nor do they confirm any of the financial information you give them. This is great if you may not be entirely ready to purchase a home, but would like to know what to expect when the time comes.
At the end of the day, a pre-qualification is relatively useless as far as closing on a loan. Thought you had an 800 score, but it is actually 600? Forgot to include child support or alimony payments? All of these have the potential to greatly impact your final approval.
Pre-Approved: Becoming pre-approved is not particularly difficult for most people but does require far more steps compared to pre-qualification. The information you provide to the lender will need to be verified, so prepare to bring documents (we'll go over what you'll need shortly). This will give you a strong indication of what you will be approved for, and allow you to hone in your home search. Sellers will take your offer more seriously, and typically, you won't encounter many issues when it comes time to finalize the purchase. Bear in mind that even a pre-approval does not guarantee you will close on your loan.
Documents You Need For A Pre-Approval
Every lender is different but there are many documents you can expect to provide to nearly all of them. It can pay off to gather this ahead of time so you don't feel rushed needing to suddenly track down everything they request all at once.
1. Identification - Make sure you can provide self-identifying documents. This can be a driver's license, state-issued identification card, passport, or U.S. alien registration card.
2. Social Security Card - You will need to provide a social security card along with your SSN. This will further support your identification document and will also be needed to check your credit score.
3. Pay Stubs - Next, the lender will want to verify your income. You will need to provide several of your most recent pay stubs to prove you have a stable, consistent income. Digital or physical copies are sufficient.
4. Bank Statements - You will need to provide any bank statements for accounts you've used in the last several months. This will further provide evidence of your income, as well as that you have funds available for your down payment. Additionally, it allows the bank to look for any signs of unaccounted income, undisclosed debts, or other potential issues.
5. Tax Documents - This goes along with the previous two documents to provide evidence of your income and employment history. Typically, you are required to provide all income tax documents (W-2, 1099, etc) for the last two tax years.
6. Monthly Debts - Your lender will be very interested in your debt-to-income (DTI) ratio. You've established your income with your other documents and will need to provide evidence of your debts to the lender as well. Debts include medical bills, credit cards, student loans, car payments, alimony, child support, and other loan obligations. Ideally, a lender wants to see your DTI below 36%. This means that if you have $6,000 in monthly income, you want to keep your debts below $2,160.
7. Credit Report - Along with your income and debts, the lender will want to look at your full credit report. This will give them details on how you've handled past credit. They'll look at your score, but also the details like any missed payments or previous (or current) collections.
8. Gift Letters - Any money used for your down payment needs to come from a verifiable source. This means, that if your family members (or anyone else for that matter) want to help you, they need to document the money they are gifting you.
9. Rental History - You'll next need to document everywhere you have lived in the past several years. Some lenders may just need addresses while others will ask for contact information for your landlord.
10. Other Income - You'll need to provide documentation for any other sources of income outside of your standard income. Typically this is from investment accounts such as a 401(k), IRA, stocks, bonds, or other common accounts.
*Keep in mind that this covers common documents for most conventional and unconventional loans, but is not all-encompassing. Some loan types, or purchase types, will require more documentation. Such as a VA loan requiring documentation related to your military service.
Find The Right Lender
Once you've gathered up your documents, it's time to start looking around for a lender! This can be rather daunting as there are so many lenders and lender brokers available. The good news is, that many of the lenders service multiple types of mortgages. This means your mortgage advisor can inform you about the different options available to you. However, it would be wise to do plenty of research on different mortgage types to see what would work best for your situation.
There are many avenues you can take when searching for a lender. There are online-only lenders such as Rocket Mortgage or Ally which allow you to quickly and easily apply for a pre-approval online with an excellent, easy-to-use online experience.
You could also stick to some of the largest national lenders such as Bank of America or Chase Bank. Many people feel comfortable utilizing these large banking institutions that they are already familiar with and perhaps do personal banking with as well.
It is also possible to go with a smaller, local lender. They may not operate on a large, national scale, but they can offer a more hands-on approach or even manual underwriting. If you want a more personal touch, this can be a great way to go.
The bottom line is that there is no single best answer on which lender will be right for you. Do a bit of research and go with what feels right and makes the most financial sense!
What To Do After Getting Pre-Approved
Once you've been pre-approved and are ready to look, it's time to hire a local realtor and begin your search! If you are looking in Oregon or Washington just send us a message and we will be happy to help your home search or even connect you with a local lender. Happy house hunting!