1. Gather Your Documentation
The first step of getting pre-approved for a loan is to gather all the financial documents the lender will require, including any documentation that proves your income, such as W-2s, 1099’s, pay stubs, tax returns, employment letters, bank statements and proof of any other assets.
You will also need identification and data such as your social security number, current address, employment information, and anything else that may be relevant. Also, if you plan on using a cosigner, make sure they have all their information handy. The more organized and well-prepared you are, the easier the process will be.
2. Calculate Your Debt-to-Income Ratio
Next, you should sit down and get a handle on all your outstanding debt. The lender will want to see a good debt-to-income ratio before they’ll approve you for a loan. Most conventional loans will require a DTI ratio of 36% or less. However, government-backed loans are less stringent.
Calculate all your outstanding debt, including student loans, personal loans, credit card debt, medical debt, child support, alimony, and anything else that may be important. Then compare that debt to your current income to determine your DTI ratio.
3. Run Your Credit
You’ll also want to run a quick credit check before seeking pre-approval. While the lender will also check your credit and DTI ratio, it’s best to do this yourself before applying for a loan so you can address any potential issues and avoid a possible denial.
Conventional loans require a credit score of at least 620 (although VA and FHA loans accept scores as low as 580). So, if your score is below that, it may be best to work on your credit before applying. The higher your score and the better your payment history, the better your chances of being approved for a reasonable interest rate.
4. Shop Around to Multiple Lenders
Once you have all your documents in order, you should shop around to multiple lenders to see who will give you the best rate. Unless you have a particular bank or lending institution you’ve been dealing with for years, it’s always a good idea to see what’s out there.
Some lenders may offer special incentives to first-time homeowners or other similar programs you can benefit from that others may not. Today, you can find many different types of mortgage lenders, all with unique advantages and disadvantages. So, it helps to shop around if you want to get the best deal possible.
5. Get a Preapproval Letter
Finally, once you’ve found a lender you feel comfortable with, you’ll sit down for a quick conversation, where you’ll go over your financials and credit history. This meeting is typically just a casual conversation where they want to know more about you and your financial situation.
If everything checks out, they will pre-approve you for a certain amount and interest rate, which they will confirm in a letter that you can show the buyer a home you’re interested in. But remember that preapproval doesn’t mean you’re guaranteed a loan, and you’ll still have to go through the underwriting process to be officially approved.
The length of time it takes to get pre-approved depends on the lender. Assuming that you have all your financial documents and other data handy, it can take anywhere from 24 hours to 10 days. During this time, the lender will verify your financial credentials and employment history to confirm that you can afford the loan.
This process could take a few hours or several days, depending on the complexity of your finances and how busy they are. But if it’s been more than ten business days since you applied for preapproval, you may want to reach out to the lender or consider another option.
Getting pre-approved for a mortgage is the first step to homeownership. Most sellers won’t seriously entertain your offer until you have a preapproval letter from a lender because they have no way of knowing whether or not you have the available funds. So, it’s essential to understand the preapproval process and how long it takes if you’re in the market for a home.