Everyone knows you need to apply for a mortgage to buy a house in Milwaukee. However, mortgage pre-approval is something not too many people are entirely familiar with. Is it necessary to get it?
If you’re preparing to apply for a mortgage, you most likely already know that this isn’t such an easy task. It’s not enough to just appear at the lender’s office and tell them how you need money to start a new life. If they’ll borrow you money, lenders want to make sure you’ll be able to pay them back in the due time. And if you want to have an upper hand, you might want to apply for a mortgage before you’ve found a dream house. This is where mortgage pre-approval becomes important. What is it, and is it really important to have one? Let’s take a look!
What Is a Mortgage Pre-Approval?
Mortgage pre-approval is, plainly said, when a lender agrees to borrow you up to a certain amount of money before you’ve found the right house for you. In other words, this is when a lender, typically a bank, digs into your financial past, trying to calculate your buying power. For this, your income will be checked with a W-2, your credit score and credit report, debt-to-income ratio, as well as other factors that are important for understanding your finances. Once this is completed, the lender will know just how much house you can afford – and if you can. It is in bank’s interest to give you as much money as possible, but not to go overboard so you can’t repay the debt in time.
Is this the same as mortgage pre-qualification?
Mortgage pre-approval and mortgage pre-qualification are not the same thing. Pre-qualification is just a basic overview of your financial abilities. To get pre-qualified, you just need to provide your lender with basic information about your income, credit, debts, assets, and how big of a down payment you can afford. There is no need to provide them with any official paperwork or documents. Pre-qualification is fairly easy to get, but it is in no means a guarantee that you will actually get your money.
On the other hand, mortgage pre-approval is a much more complicating step. Not only do you need to give all the necessary paperwork to your lender, but the bank itself will conduct a research, ensuring that all the information you have provided is true. This way, they’ll verify your assets and income. Then, the underwriter needs to make a preliminary review of your finances, and this includes the amount you have for the down payment. If all goes well – and sometimes, it doesn’t – you’ll get a written commitment from the bank, as a guarantee that you will get up to a certain loan amount.
This commitment isn’t forever, though, and you usually have 90 to 120 days to find your dream home. The pre-approval process is typically free, and it lasts around three to five days to process your application.
What Documents Do You Need to Provide?
To get pre-approved, you’ll need to provide personal documents, as well as a few other things. We’ll list the standard ones below.
Proof of Income
The first document you need to provide for your pre-approval are W-2 wage statements, typically from the past two years. Also, you’ll need to send pay stubs that show both your income and a year-to-date- income, proof of any additional income, as well as two latest yearly tax returns.
Proof of Assets
Your lender will also require bank statements, as a proof that you have enough funds to cover the down payment and closing costs. How much cash you need depends on your personal situation, your lender, and the type of loan you’re applying for.
To get a pre-approval, you’ll most likely need to have a FICO score of 620 or higher. If you manage to have a credit score of 760, you may even ensure a lower interest rate. Sometimes, though, lenders won’t mind even if you have a credit score of 580.
Proof of Employment
Lenders don’t want to work with people who don’t have a stable income. Because of this, they’ll want to verify your employment. Sometimes, you’ll need to provide paperwork from your company, but most of the times the lender will personally contact your employer, asking for information. If you’ve changed jobs in the past few months, expect your lender to contact your previous working space, as well.
If you’re self-employed, you’ll need to provide additional paperwork as proof of your business and income. The exact documents may vary, but you’ll need to prove you have a stable income, verified location and nature of business, a strong demand for your services, as well as your ability to continue provide income for yourself – and your loan.
Why Is It Important to Get Mortgage Pre-Approval?
Getting a mortgage pre-approval gives you a huge upper hand when buying a home in Milwaukee. This is a proof that you are a serious buyer, and that the deal won’t fall through because of your finances. In fact, many sellers don’t even want to consider offers from buyers who aren’t pre-approved, as they don’t want to risk losing the deal. Without a pre-approval, there is no guarantee that you will be able to complete your purchase.
Does Mortgage Pre-Approval Impact Your Credit Score?
While we’d always suggest talking to several lenders about getting your mortgage, it would be smart to apply for only one mortgage pre-approval. Why is that? As you probably already know, each time you apply for a loan, your credit score drops for a bit. The same goes with mortgage loans. In fact, a mortgage application can cost you up to 14 credit points! While this doesn’t sound like a lot, it can pile up, and as a result, you might lose the chance to get a mortgage whatsoever! This is why you don’t want to try to get pre-approved with several lenders. Find the one with the best offer for you, then send in your application.