There are five requirements to be pre-approved for a mortgage.

Most sellers will only deal with buyers who can demonstrate that they are able to secure a loan, and they often require buyers to secure pre-approval for financing. When used in this context, pre-approval has a greater meaning than when it is used in other contexts (like credit card offers). Here, it indicates that the buyer’s credentials have been confirmed by a lender, and the pre-approval is valid for a period of two or three months.

Read More: Prequalify for a Mortgage Without W2

Proof of income and assets, strong credit, verified employment, and the paperwork required for a lender to do a credit check are the main requirements for pre-approval.

Pre-Approval vs Pre-Qualification

When estimating how much a person can afford to spend on a property, a mortgage pre-qualification can be helpful, but a pre-approval—which is frequently good for 60 to 90 days—is more beneficial. It indicates that in order to authorize a certain loan amount, the lender has examined the buyer’s credit, validated their assets, and verified their employment.

Lender consultation, pre-approval letter acquisition, loan choices discussion, and budgeting are beneficial to buyers. The maximum loan amount will be provided by the lender, which will aid in determining the home shopper’s pricing range. Using a mortgage calculator can assist buyers in budgeting.

Needs for Prior Approval

A buyer seeking mortgage pre-approval must fill out an application and submit supporting papers, evidence of assets, income, and excellent credit, along with an employment verification.

Depending on the kind of loan, pre-approval is based on the buyer’s debt-to-income ratio (DTI), FICO credit score, and other variables.

All loans, with the exception of jumbo loans, comply with Freddie Mac and Fannie Mae regulations. Certain loans are intended for first-time or low-to-moderate income homeowners. Others, like no-down payment Veterans Affairs (VA) loans, are exclusive to veterans and active duty members of the US military.

1. Evidence of Income

W-2 salary statements, tax returns from the previous two years, current pay stubs displaying income and year-to-date income, and documentation of supplemental income sources like bonuses or alimony are all required for prospective homeowners.

2. Asset Verification

Statements from a borrower’s bank and investment accounts attest to their ability to pay the needed down payment, closing expenses, and reserves. Depending on the kind of financing, the down payment is stated as a percentage of the selling price. For many loans, if the buyer does not put down at least 20% of the purchase price, they must incur private mortgage insurance, or PMI.

3. Reputable Credit

For a conventional loan to be approved, most lenders need a FICO score of 620 or better; for a Federal Housing Administration loan, they need a score of 580. Customers with credit scores of 760 or above are usually eligible for the lowest interest rates offered by lenders.

A 30-year fixed interest rate mortgage’s monthly principle and interest payment is displayed in the chart below for three typical loan amounts, depending on a variety of FICO scores. Buyers may view the impact of several factors such as credit score, loan type, home price, and down payment amount on interest rates by using an interest rate calculator provided by the Consumer Financial Protection Bureau.

A homeowner with the lowest FICO score (620–639) would pay $1,879 a month on a $250,000 loan; a homeowner with the highest score (760–850) would pay just $1,607 a month, or $3,264 less annually.

4. Verification of Employment

Lenders would probably call the borrower’s workplace to check employment and salary in addition to confirming employment through the buyer’s pay stubs.

The self-employed buyer furnishes supplementary data, including the borrower’s income stability, the business’s location and characteristics, its financial stability, and its capacity to generate and disburse enough revenue to allow the borrower to fulfill the mortgage payments.

5. Additional Records

The borrower must provide the lender with their driver’s license, Social Security number, and consent to get a credit report in order to be pre-approved.

Approval vs Pre-approval

When a lender receives a completed mortgage application, they have three business days to submit a loan estimate. It describes the maximum and pre-approved loan amounts, the terms and kind of the mortgage, the interest rate, the estimated interest and payments, the projected closing fees, the estimated amount of property taxes, and the homeowner’s insurance.

Eventually, the loan file will be sent to a loan underwriter, who will check to see if the borrower satisfies the requirements of the particular loan program before granting complete approval. The buyer and lender can proceed with the loan closure if the buyer’s financial circumstances haven’t altered after pre-approval. When the buyer completes the home’s appraisal and applies the loan to the property, the loan is approved in its entirety.

What Happens If Your Pre-Approval Is Denied?

A lender will decide whether to pre-approve, refuse, or pre-approve with restrictions after examining a mortgage application. In order to satisfy the loan requirements, these conditions could ask the borrower to supply more documents or lower their current debt. If a borrower is refused, the lender ought to provide an explanation and suggestions on how to increase the likelihood of pre-approval.

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