A mortgage preapproval is normally faster and easier than most people think. To facilitate the process, you should decide on a monthly amount you’re comfortable paying and use a mortgage calculator to see some typical loan and payment amounts. Then, you need to obtain a bank statement showing your balances and your last salary invoice.
Your lender of choice will enter this data into their system. The system will then “decide” on whether you’re subject to preapproval. We’ll provide more information about this later.
Sometimes, it can all take less than an hour. You can expect a prequalification letter within three days.
However, prequalification is not the same as a preapproval. They take different amounts of time. For preapproval, you’ll be asked for more information. After supplying all the documents requested, you can expect your preapproval letter in up to 10 days.
Preapproval is More Valuable Than Prequalification
While the latter is a valuable estimate of how much you can afford to spend on a property, the former is far more important. Preapproval means the loan provider has checked your credit and had the documentation verified. Then, a set loan amount has been approved. Approval is not indefinite. Usually, it lasts for about two to three months.
You need good credit, proof of income and assets, and employment verification to get preapproved for a mortgage. Your lender may require other types of documentation as well. Your bank statements will serve as proof that you’re able to afford the down payment and have sufficient cash reserves.
Down payments differ based on the type of loan. Typically, they are expressed as a percentage of the home’s price. 20% of the selling price is a reasonable down payment. If you can’t afford that much or would rather put less down, you’ll be required to pay a funding fee or a mortgage insurance premium or buy private mortgage insurance. Preapproval is also based on your debt-to-income ratio, your FICO credit score, and other factors.
As proof of income, you’ll be asked to provide pay stubs that show year to date income, W-2 wage statements, tax returns for the past two years, and proof of additional income. This might include bonuses or alimony.
Stay Current on Mortgage Rates
Like everything else, mortgage rates are not immune to fluctuation. Ask your lender for rate quotes when you talk to them about obtaining preapproval. Soon, you’ll be saving money and time.
Pros of Automated Underwriting
Lenders use automated underwriting systems to issue prequalification or preapproval decisions. The most common ones are Freddie Mac’s Loan Prospector and Fannie Mae’s Desktop Underwriter. The system will process your bank balances and income information and check your credit. The calculations have been automated as they are quite complicated to perform manually.
Types of Outcomes
Based on the data you’ve provided, the system will make a decision. This decision will be “approve” or “refer”. There is a third option: “caution”.
Ideally, your data will match your documents, and you’ll be approved. The decision to “refer” someone does not mean you’ve been rejected. You just need to change something to obtain approval. Maybe the lender requires more information, or you’re not eligible for that specific program.
Finally, the “refer with caution” outcome most likely means rejection. An exception is if you’ve been the victim of identity theft.
To finalize your preapproval, your loan provider’s decision comes with a list of required items. You might get approval to buy a home for $300,000 with a loan of $220,000. The loan provider might ask you to supply a salary invoice proving you make $85,000 a year, bank statements showing a balance of $95,000 or more, and a statement proving you paid your car loan off in full two months ago. You can get all of these things with a call or might even have them on file.