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How to Be Approved for a Mortgage

The early stages of the mortgage process involve meeting the qualification requirements and paperwork on the day you meet with your lender to sign the agreement.

This article will help you understand prequalification, preapproval, and the differences between the two.

Prequalification vs Preapproval

Prequalification and preapproval are two agreements that a borrower needs to acquire before being considered eligible for a loan. It is important to know the difference between the two and what documentation is required to qualify for a loan.

Prequalification is a tentative agreement based on the financial standing of the borrower upon their disclosure of their credit information and gross monthly income. Prequalification is nonbinding and does not involve underwriting - where a contractual agreement has been reached between the lender and borrower - therefore, it is practically a way of seeking the lender's consideration for a mortgage approval. What the prequalification letter states is that eligibility is likely, however, a prequalification letter most definitely does not give any eligibility for a mortgage since the process does not include an assessment of the borrower's credit. 

Preapproval involves underwriting after the process of detailing your financial standing from all angles in order for the lender to reach a final mortgage plan for you. As a borrower, you want a preapproval letter as it will clearly state the size of the loan you're going to receive (outlined in a Loan Estimate), the annual interest rate on the loan, what your payments are going to be and the schedule in which you're obligated to pay them. 

"Preapproval" to the layman is often misconstrued as an approval in advance of some activity but that is not the case here. Preapproval literally refers to the period of time before the actual loan agreement is reached. It does not offer any rights to the borrower or create liability on the lender.

What distinguishes the preapproval letter from the prequalification letter is the disclosing of the loan estimate based on the borrower's current financial data (usually given in the prequalification period). Your house shopping budget depends on the loan range you're issued and it does, in fact, make house shopping a lot easier and more clearly defined. Some real estate agents will often prioritize preapproval letter holders because it demonstrates that they are able and serious about the purchase.

Required Documentation for a Pre-Approval

The more cooperative you are, the smoother and more beneficial to you the process of approval is going to be; to the extent that the lender is going to assess your credit-worthiness. Your taxes, student loans, monthly payments, automated payments, credit card payments, monthly gross disposable income, debts, and assets are all a measure of your credit score and how much of a liability you're going to be for the lender. 

The data required for preapproval are the following:

  • Proof of Income: You need to have your W-2 form detailing your yearly income and tax returns over the past two years. 
  • Proof of Assets: This is to show that you have enough for a down payment, closing costs, and leftover reserves.
  • Credit Score: Once your lender has assessed your financial standing, they will be able to determine your credit-worthiness in terms of your credit score. This is crucial to how good of a loan you're going to get. If your credit score is too low, lenders will try and figure out a way to improve it.
  • Proof of Employment: If you are self-employed, you'll need to give substantial paperwork outlining your job stability. Other than that, your lender will inspect your recent employment history for the same reason.
  • Social Security and Other Documentation: All the aforementioned items as well as your Social Security number and driver's license need to be with you when you meet with your lender.

For more information on the minimum mortgage requirements, click here.

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