Thinking about buying a home in the near future? Smart buyers start the home search by first getting pre-approved for a mortgage. The process of getting pre-approved is relatively simple and allows you to shop for homes with confidence.
What is a mortgage pre-approval?
A mortgage pre-approval is a full mortgage commitment, subject to a fully executed purchase contract and the completion of an appraisal.
During the pre-approval process your lender will evaluate every aspect of your finances as they relate to the house you intend to purchase. Your credit history, income, debt and assets will all be closely examined. Upon completion, your lender will have an accurate assessment of your financial landscape and will be able to comfortably determine how much you can borrow.
Before you go through the pre-approval process it makes sense to get your ducks in a row. Here's the 4 best tasks to complete before you get pre-approved for a mortgage:
#1 Locate all documents needed for the pre-approval
There's a lot of paperwork involved in the pre-approval process, so go ahead and gather all necessary paperwork. This includes:
- Last two years of income tax returns
- 2 most recent pay stubs
- Last 2 years of W2 statements
- Statements for any account that you'll be using to fund your down payment
- Driver's license and social security card
- Gift letter (if using gift funds for your down payment)
# 2 Check your credit score
Your credit score is directly related to the loan terms offered to you. For instance, over the lifetime of your loan, a borrower with a credit score of 620 will likely pay thousands of dollars more than a borrower with a credit score of 740.
Go ahead and check your credit score before you get pre-approved so you can evaluate your score, observe and report any discrepancies and spend a few months working on the negative factors of your score.
#3 Figure out how much house you can afford
Just because you get approved to by a $300,000 house doesn't mean your budget can afford it, given your financial goals.
Sit down and make a household budget (factoring in your potential mortgage cost) and figure out how much home you can afford based on all monthly expenses, and saving goals.
#4 Save for a down payment on a house
Good news for first time home buyers; there's down payment options for every budget.
USDA loans offer rural and suburban homeowners that qualify a loan with 0% down.
Likewise, members of the military, veterans, reservists and National Guard can qualify for a 0% down through a VA loan.
Most first time buyers opt for a FHA loan and can buy a home with as little as 3.5% down.
For borrowers with good credit, conventional loans require just 3% down.
Final thoughts on what to do before you get pre-approved for a mortgage
Getting pre-approved for a mortgage before you start the home search process gives you the confidence to shop for homes within your budget and makes the closing process a breeze.
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