When shopping for the right mortgage, the preparation can be as important as the shopping itself. The approach matters, and how you prepare can help make you a more informed shopper. When you’re looking to work with a mortgage broker in Philadelphia, one service you’ll see advertised is pre-approval. Pre-approval is a valuable tool for buyers and brokers alike. Today, we’ll dive in to what pre-approval is, how it works, and why you should seek pre-approval when shopping for your home.
Pre-Qualification vs. Pre-Approval
Before we get into the weeds of pre-approval, we should first clear up the conflation of pre-qualification and pre-approval. Pre-qualification is an early-stage process, where you have a broker or lender take a cursory glance at your finances to see if you’re even in the right financial position to afford a home mortgage. This is usually the first step and reserved for those who are interested in the prospect of homeownership but are entirely unsure if that’s feasible for them.
Pre-approval, on the other hand, is a deeper dive into your financial standing. It’s not meant to only assess whether you can afford a mortgage, but how much you will be able to afford. Pre-approval requires more effort on your part to source documents and provides a clearer view of the mortgage process down the road for you.
Required Documents for Pre-Approval
While the required information you need to provide can vary per the mortgage broker in Philadelphia you’re working with, generally, there are several types of documentation you will need for your pre-approval application. These include:
- Previous tax return
- Past 60 days of bank statements
- Past 30 days of pay stubs
- Monthly debt payments, including car loans, credit card payments, and student debt
- Proof of assets and their values, if neccesary or applicable.
- Drivers license or passport
Individual brokers or lenders may require additional information.
Steps in the Pre-Approval Process
Once you’ve gathered the necessary documentation, here are the steps you should take to secure pre-approval
- Obtain your credit score: Your credit score is a valuable tool lenders use to determine your overall credit health. Lower credit scores may result in a higher down payment being required from lenders. Generally, the minimum score lenders will accept is 630, the floor of the “fair” category. However, those with lower scores may be able to seek specialized loans such as an FHA loan to assist with loan eligibility and down payment assistance.
- Obtain your free annual credit report: Every year, you are entitled to a free credit report from the three major reporting companies, TransUnion, Experian, and Equifax. To obtain yours, simply click here. Make sure to review for any errors, and work to have them corrected before proceeding.
- Calculate your Debit-to-Income Ratio: This is one of the most important numbers lenders use to assess whether you are a qualified borrower. Your debt-to-income ratio allows them to take a look at how effectively you take on debt and pay it versus what you make. If you’re unsure of how to do that, check out NerdWallet’s DTI ratio calculator for help.
- Fill out application: Once you’ve gathered the neccesary information, it’s time to fill out the pre-approval application for your chosen mortgage broker in Philadelphia. Here, you will be asked for some more information usually. This includes things such as the type of loan your seeking, employment information, information about your realtor if you’ve already selected one, and infromation about the property if you have one in mind. The more info you can provide a broker or lender, the more accurate they’ll be able to be when delivering you with results.
What Can Pre-Approval Do For Me?
When you’ve completed pre-approval, your broker or lender will give you a pre-approval letter. This is documentation that identifies how much they estimate you can afford. It can be useful, as you can present it to realtors and sellers to show that you are capable of affording a particular property and are serious about moving forward with purchasing the home.
What Can Pre-Approval NOT Do for Me?
While it can inform sellers of your intentions, it is crucial to remember that pre-approval is NOT the same as having a loan guaranteed. The numbers you receive from the pre-approval process are not a promise of your final loan amount or term, and it’s important to emphasize that you don’t actually have a loan until the documents are signed
Get Started on Your Pre-Approval Today
If pre-approval sounds right for you, get started working with a celebrated mortgage broker in Philadelphia and across the east coast in Federal Hill Mortgage. Our top-ranked team can help you achieve your loan goals with prompt pre-approval services. Apply today to get started.