What is mortgage preapproval?
Getting a mortgage preapproval is a great way to show sellers and lenders that you are serious about purchasing a home. So what exactly does getting preapproved mean?
Many home buyers (not just the first-timers) believe that purchasing a home starts with searching for the perfect home, and attending open houses. While there's nothing wrong with starting there, starting your home buying journey by talking with a lender can be more beneficial. Potential home buyers can actually gain the upper hand in buying a home by receiving a preapproval letter from a lender.
Mortgage Preapproval Letters
A mortgage preapproval letter, for those who don't know, is a document originated by a lender after evaluating your financial profile. It states the maximum amount you're eligible to borrow for your home loan. Preapproval is a cut above pre-qualification, another popular place to begin the home buying process, as it involves a detailed credit check and verification of your documents.
Seeking a preapproval letter is simple. All you have to do is consult with a lender and provide some basic information. This alone can be beneficial, as it gives you the chance of discussing your budget and the mortgage options available to you. The lender will then perform a "hard pull" of your financial history. This means that they will heavily scrutinize every aspect of your financial profile. Please bear in mind that the "hard pull" will affect your credit. Don't fret too much though, as this also allows you to find out if you have any problems or red flags that you may not have been aware of that could hinder your home purchase. Once this is complete, the lender will draft up your preapproval letter, which will indicate a maximum amount that you are approved to borrow. With this approval in hand, househunting within your budget will be a breeze!
What documents Do You Need for a mortgage preapproval?
Obtaining a preapproval letter requires a lender to review your financial history. To do this, lenders often need the borrower to provide necessary documentation. This often includes:
- Personal information (driver’s license, address, Social Security number, marital status)
- Recent statements from bank and investment accounts (usually the most recent two years)
- Employment information
- Recent pay stubs and W-2 income tax forms for the last two years
- Total monthly expenses, including bills paid regularly
- List of any assets (stocks, 401(k), IRAs, bonds, cash) and liabilities (any debt obligations like credit cards, student loans, or car loans)
- Profit and loss statements if you're self-employed
- Income from any rental properties
- If you're using a monetary gift from a relative to help cover the down payment, you must provide a gift letter
The plus side is that gathering these documents ahead of time will take away tons of stress at closing, as many of these documents are also required in the final steps of purchasing a home.
At the end of the day, getting a mortgage preapproval, while optional, is a great place to begin the home buying process.