10 Q&As About the Mortgage Preapproval Process

While getting prequalified for a loan can provide you with an initial understanding of how much you can afford to spend on a home, it is not nearly as valuable in the homebuying process as having a preapproval letter from a lender. To get prequalified, you typically only have to answer a few questions about your finances, and none of the information you provide is verified. For this reason, a prequalification is only an estimate of what mortgage you might be able to afford, and it is certainly not a guarantee that the lender would loan you this amount. On the other hand, to provide you with a preapproval letter, a lender will check your credit, verify financial resources, and much more, so it demonstrates to sellers that you are a serious buyer who is likely to be able to get the necessary financing to purchase their home.

You should start the conversation with a lender at least two months before you think you will be ready to buy. However, if you are aware that you have credit history issues that could affect your ability to borrow, you should start this conversation even earlier and get advice on how to put yourself in a more favorable loan position. The following are a few credit score pointers our mortgage experts provided:

• Don’t apply for new credit of any kind.
• Don’t pay off old collections or charge-offs.
• Keep balances low on credit cards (below 30% of the available limit) and other revolving accounts.
• Don’t consolidate debt to one or two cards or close credit card accounts.
• Don’t make any adjustments or transfers in your asset picture, like changing investments, closing accounts, or opening new accounts, before speaking with your loan officer.
• Don’t make large, unexplainable deposits into bank accounts or transfer money between bank accounts.
• Don’t make changes to your employment or income.

A preapproval letter does have an expiration date. Most lenders allow mortgage preapproval letters to remain effective for 120 days, while others may only guarantee mortgage preapprovals for 30, 60, or 90 days. If your preapproval letter expires before you’ve purchased a home, you can generally contact your lender and answer a few quick questions to establish that nothing has changed about your financial situation since the initial preapproval process. Then, they will update the letter for you with an extended expiration date. However, if you’ve had any changes in employment, taken on a new loan, made a large purchase, or made any other moves that have affected your finances, a longer conversation will likely be necessary.

Even though this is just the preapproval for your home mortgage, you should expect the lender to be very thorough in their analysis. For this evaluation to take place, the lender typically needs the following documentation and information:

• Proof of income. You may be asked to produce W-2 wage statements from the past one to two years; your most recent pay stubs that show current income and year-to-date income; proof of any additional income such as alimony or bonuses; and the most recent year’s tax returns.
• Proof of assets. Your lender will likely ask you to provide recent bank statements and investment account statements to prove you have funds for a down payment and closing costs, as well as cash reserves.
• Credit reports. There are three credit reporting agencies that your lender will check: Equifax, Experian, and TransUnion. The information on these reports typically affects the interest rate the lender is willing to give you, how much of a down payment they may require from you, and what type of loan they are willing to approve.

There could be additional paperwork requested along the way. If that’s the case, our mortgage experts recommend responding as quickly as possible to ensure that you get approved in a timely manner and don’t hold up your homebuying process.

As a lender reviews your employment history, credit score, available assets, personal qualification factors, and more, the following circumstances might positively or negatively impact a lending decision:

Positives

History of being in the same line of work for at least two years
Staying current on all existing accounts
Credit score of 680 or higher
Normal credit card use
Documented savings or other source of funds to cover a down payment and closing costs

Negatives

Multiple job changes, income instability, or multiple employment gaps
Late payments on any existing loans
Credit score of less than 620
Change in the billing credit card information for any monthly services
Lack of funds for a down payment or closing costs

There are several options for first-time homebuyers to get a mortgage, even if you have minimal to no funds for a down payment and a poor credit history. However, most of these loans are government-sponsored ones. The two types of government-backed, no-down-payment mortgages are USDA loans and VA loans. You will find that there are specific criteria you must meet to qualify for these zero-down-payment loans. If you are not eligible for these loans, you might want to look into a government-backed FHA loan, which allows for lower down payments—as low as 3.5%—and is available to individuals with low credit scores, nontraditional credit history, or no credit history at all. If you have good credit but just don’t have a lot saved for a down payment, a conventional home loan backed by Fannie Mae or Freddie Mac is an option that requires only 3% down.

A mortgage broker’s role is to help homebuyers identify the best lender for their specific situation. There are many benefits to using a mortgage broker, including:

• Unbiased assistance in assessing your needs and financial situation.
• Coordination of gathering the information and documents the lender will require and sending all of this to a bank or lender for your loan approval.
• Access to multiple lenders and a variety of quotes to help you find the best rates.
• Personalized communications that regularly update you on your application and where you are in the loan preapproval process.

A direct lender, on the other hand, is a bank or other financial institution that decides whether you qualify for the loan and, if you do, hands over the check. If you have a relationship with a financial institution or private entity that provides mortgage loans, you may want to deal directly with it. But while the process might move a little faster this way because there is no go-between, you could be leaving money on the table by not shopping around your mortgage for the best interest rate, closing costs, lender fees, and more.

With so many different loan programs to choose from and countless ways to structure a loan in terms of the amount, term, payment, interest rate, and more, it is critical to find a mortgage professional who can help you with your specific needs. Because your broker should be one of your greatest advocates during the homebuying process, you will want to make sure this person is knowledgeable, experienced, reliable, and trustworthy. So, how do you find the right person? Asking for a referral from a friend or family member who has recently bought a home is a good place to start. You can also contact the Massachusetts Mortgage Bankers Association (MMBA) at 617-570-9114 for assistance in locating a broker who is in your area. After you’ve received one or more referrals, it’s wise to do an online search to see if any reviews—positive or negative—pop up. This might help you narrow down your choices. Once you have identified a few brokers you’re interested in, schedule consultations with them so you can evaluate which one you want to work with throughout the homebuying process.

Just because you work with a specific broker or lending institution for the preapproval process does not mean that you have to stay with them for your final loan. Once you have your preapproval in hand, you can shop around for better interest rates or special offers on closing costs. Or you may want someone who provides better customer service and spends more time educating you about the process. Whatever your reason, it is perfectly fine to explore using other lenders in the future.