How to Get Preapproved for a Mortgage on a Home

Oct 20, 2022

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Buying a home can often be a complicated process, which is why it’s so important that you plan ahead as much as possible.

One of the best ways to do this is by getting preapproved for a mortgage before you find the home of your dreams. That way, you already know what you can afford to offer, and you don’t have to worry about losing the house you want while you’re waiting on approval.

5 Steps to Get Preapproved for a Mortgage

This is a fantastic way to begin your house-hunting journey but getting preapproved takes a little work.

Specifically, you’ll need to make sure you’re able to provide lenders with the following five forms of documentation before they’ll preapprove you for a mortgage.

1. Proof of Income

If you’re new to buying a house, you might find it hard to believe that there was once a time when banks would lend money without much proof that the borrower had the kind of income required to pay it back. Unsurprisingly, these “no documentation” loans are long gone after the 2008 housing crisis.

Instead, mortgage lenders want to see “proof of income”, including:

  • W-2 statements going back two years
  • Recent pay stubs that prove your current income
  • Proof of bonuses or other forms of income
  • Year-to-Date Income
  • Last two years’ tax returns

The better these statements speak to your ability to pay back the loan, the easier it will be to get preapproved for a mortgage.

2. Employment Verification

You might think that a pay stub would be enough to prove that you’re gainfully employed, but lenders have learned to be extremely cautious when it comes to approving borrowers. Even if you show them a recent stub, they still want to be 100% sure your employment status didn’t recently change.

So, you should expect that a lender will call your employer to make sure you’re actually an employee and to verify that you were being completely honest about your salary. A recent pay stub might reflect a commission that you only receive once a year. Again, lenders aren’t taking any chances anymore.

If you’re self-employed, getting preapproved for a mortgage will be significantly harder, though far from impossible. Aside from your tax returns and proof of income, you may also be asked for a profit-and-loss statement if you're a small business owner.

3. A Healthy Credit Score

Every lender is different, but to get preapproved for a mortgage, you’ll most likely need a credit score of at least 620. You might get approved with less than that, but your terms will reflect the bank’s concerns about your ability to pay them back.

The lender will run a credit report to learn your FICO score, so you don’t need to worry about providing “proof” as with your income. Still, it’s a good idea to run your own report long before you seek pre-approval. You want to give yourself as much time as possible to improve your credit score before applying for a mortgage.

Similarly, if you already have a lot of debt, it would be best to pay down as much of that as possible before applying for a mortgage. Lenders will look at your debt-to-income ratio, which shows them how much of your income is already spoken for by other obligations. The more income you have available every month, the bigger the mortgage for which you’ll qualify.

4. Proof of Funds for Closing Costs

Your income and credit score vouch for how much you can spend every month to pay off your mortgage, but what about the down payment and closing costs?

Lenders want to see that you have enough money on hand to make those and other initial payments. You don't need a 20% down payment to buy a house, but lenders will require that you pay for Private Mortgage Insurance (PMI) if your down payment is only 5%, for example.

Adequate proof of funds translates to the amount of the down payment plus expected closing costs. You’ll be asked for banks statements going back 2-3 months. This will prove that whatever you currently have in your savings account, money market accounts, etc. wasn’t added recently.

For that reason, if you are showing any recent large deposits, be prepared to prove where they came from. Specifically, lenders don’t want to find out that the money was a loan from a loved one, funds they gave you to make your mortgage application look better but that will need to be paid back.

5. A Healthy Debt-to-Income Level

Your debt-to-income ratio (DTI) is critical for mortgage qualification. DTI determines whether you’re eligible for the monthly payment. You want your DTI to look attractive to a lender.

Luckily, today’s mortgage programs are very flexible and depending on your income, you're likely to get approved as long as you fall within a healthy DTI range. To determine your debt-to-income ratio, adding up all your monthly debt payments. Next, divide the sum of your debts by your gross monthly income (the amount you earn every month before taxes and other deductions).  Otherwise known as your "pre-tax" income. Lastly, multiply the figure by 100. Here's an example below:

Lets say your monthly debt expenses equal $3,500. And lets assume your gross monthly income is $8,000. Here's the calculation for your DTI:

$3,000 ÷ $8,000 = 0.4375

In this case, your debt-to-income ratio is 43.75% which would be good. In general, here are some guidelines to consider:

  • 35% DTI or lower: Excellent
  • 35 - 44% DTI: Good
  • 45 - 49% DTI: Acceptable
  • 50% DTI: Maximum allowed for most lenders

Shop Around for a Low Mortgage Rate

Getting preapproved for a mortgage is exciting. However, don’t get so fixated on the prospect that you simply accept whatever you’re offered. Instead, shop around for a mortgage to make sure you’re getting the best possible rate. The mortgage-approval process may only take a month or two, but it’s worth slowing down a bit to be sure you lock in the best deal you can find.

Other Ways To Save Money on the Purchase of Your New Home

While shopping around can help you save money on your mortgage, another great way to keep costs down when you purchase a home is with SimpleShowing Homebuyer Refund Program.  On average, this Homebuyer Refund program gives customers average of $5,000 paid towards closing costs.

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