Pre-approved borrowers rest a little easier than other wanna-be homeowners, knowing that they’ve already jumped through most of the hoops to qualify for a mortgage. Sellers are happier with pre-approved borrowers, too, because sellers can trust those buyers’ offers.
As a savvy soon-to-be homeowner, you know that getting a mortgage pre-approval is absolutely critical if you want your home buying process to go smoothly.
(New to the idea of pre-approval? Not sure when you should get pre-approved for your mortgage? You can check out the previous posts in our pre-approval series here.)
What does it actually take to get pre-approved for a mortgage?
Ultimately, lenders decide whether to approve a potential borrower based on four key factors:
- Credit History
How exactly do these factors determine whether or not you’ll be pre-approved for a mortgage? And what documentation will you need to provide to get pre-approved?
When evaluating potential borrowers, lenders’ biggest concerns are pretty straightforward. Can this person afford to borrow the money for this home? Can we trust this person to pay us back?
As you might guess, How much money does this person earn? is pretty high on a lender’s list of concerns when trying to determine whether an applicant is a good bet for a mortgage. So to pre-qualify for a mortgage, you’ll need to let lenders know just how much money you’re bringing home every month.
Interestingly, how much you make is not the only income-related question lenders are curious about.
Mortgage lenders want to know that you are making money, but they also strongly prefer to see that you’ve been employed with the same company (or at the very least, in the same profession) for a few years. Leaving your job or changing careers mid-way through your mortgage application can potentially jeopardize your home financing. At the very least, quitting your actuarial job to become a trapeze instructor is going to make the mortgage underwriters very nervous.
Income documentation required for mortgage pre-approval: At a minimum, you’ll need to provide a copy of last year’s tax returns. If you’re a salaried or hourly-wage-earning employee, you’ll also need to have your most recent W2s. You may not need to hand over your most recent pay stubs for pre-approval, but you’ll definitely need them for your full mortgage application, so have copies of any recent pay stubs on standby.
If you own a business or are self-employed, go ahead and get ready for a pretty thorough review of your business finances: it’s not unusual for lenders to want to this month’s or this quarter’s books, some profit-and-loss statements, and a few years of the business’s tax returns.
And don’t forget about documenting income from social security, disability, child support, or your side hustle walking dogs. Basically, if the income shows up in your bank account at any point, you’ll need to account for it before the mortgage process is over.
Contrary to the unsolicited financial advice that one uncle of yours likes to offer up at family gatherings, you do not need to have 20% of the cost of your future home ready to use as a downpayment.
But even if your homebuying future includes a low downpayment, you will still need to have some funds in the bank to buy a home. There are closing costs, moving expenses, and usually some quick one-time repairs or improvements you’ll want to make to your new home right as you move in. Some lenders will want to see that borrowers have several months’ worth of future mortgage payments in reserve cash, just in case something happens. Plus, your lender will want to make sure that your professed income lines up with what’s in your bank accounts.
Asset documents required for mortgage pre-approval: Usually, you’ll be asked to provide a few months’ worths of statements for your checking and savings accounts. (If you are using Morty for your pre-approval, you won’t need to print and then scan pages and pages of old bank statements. We’ll help you do that part online, no fussy printing and scanning required.)
You will also need your most recent statements from any investment or retirement accounts you currently have—especially if you’ll be drawing from investments for, say, your down payment.
For a mortgage pre-approval, you will probably only need to list your property assets.
But have the deeds and information about any other property you own on standby: you’ll need to include that documentation with your complete mortgage application.
You do not need to be 100% debt-free before you take on the joys and responsibilities of homeownership. What you will need is a current debt-load that, when combined with your soon-to-be mortgage payment, still leaves you enough money to eat and pay utility bills and occasionally get new shoes with the old ones wear out.
Mortgage lenders will calculate your debt-to-income ratio when determining whether or not you qualify for a mortgage. Generally, lenders are hoping to see that even with the additional expense of a mortgage to pay, you won’t be spending more than an absolute maximum 43% of your pre-tax income repaying debts.
(And it’s worth noting that 43% of your pre-tax income is a pretty sizable level of debt. Even if lenders allow it, it’s almost definitely in your financial interests to try to keep your personal debt-to-income ratio lower than that.)
Debt documentation required for mortgage pre-approval: Lenders will be able to glean most of your debt obligations from your credit report. If you’ve got other debts that may not show up on your credit report—perhaps you pay child support or alimony, or you have an informal family debt that you’re repaying—be sure to list those obligations on your pre-approval application, and gather any court orders or other supporting documents for later.
A Good Credit Score
If you’re the kind of person who has been routinely tracking your credit score for ages, then you are in luck. Buying a home is one of those moments in your life where your credit score really does matter.
If you haven’t been obsessively tracking and tweaking your creditworthiness for your entire adult life, don’t fret. Your credit score does not need to be stratospherically high to be qualified for a mortgage. Almost all lenders will work with borrowers whose scores are in at least the mid-600s.
Currently, conventional mortgages (those backed by Fannie Mae and Freddie Mac) require a minimum credit score of 620. Credit score requirements for FHA mortgage are even lower, though just how low depends on how much the borrower is able to use for a down payment. With an FHA loan, a would-be homeowner can have a score as low as 580 if he is able to put 3.5% down, and as low as 500 if she can put down at least 10%.
Credit documentation required for pre-approval: Lenders will want to see credit reports from all three of the credit reporting bureaus for you and for your co-borrower (if you have one). Usually, lenders use the middle score from the three different reports to determine what loan types and products to offer you. (If your co-borrower’s credit is significantly lower than yours, the lenders will probably use the lower-middle score of the two.)
You won’t have to request and print credit reports for yourself, though. During the application or profile-building process, you’ll just need to give your permission to have credit reports generated for you and your co-borrower.
Got all that?
Getting pre-approved for a mortgage involves a pretty thorough look at your finances, though the actual pre-approval process doesn’t need to be long, hard, or tedious.
If you’re ready to get pre-approved for a mortgage now, you can head over here to get started with Morty.