How to Get a Mortgage Pre-Approval

If you’re getting ready to buy a home, you’re probably hearing the term “Pre-Approval.” In most buyer scenarios, obtaining mortgage pre-approval is a necessity for the home-buying process, yet it’s often unclear what it entails. Go into the pre-approval process prepared, with a full outline of what to expect before, during, and after your meeting with a mortgage lender. 

Use this blog article as a reference when you’re going through the pre-approval process. In it, we’ll elaborate on:

• How the pre-approval process gives you an estimate on the size of the loan a lender will grant you which helps you understand the home price you can afford.
• What you need to get pre-approved and the information you need to gather for your mortgage lender including your credit score, proof of income, W-2s, your debt-to-income ratio, and a form of identification like your social security number or driver’s license.
• How your pre-approval only lasts 60-90 days, and you can renew it by contacting your lender.
• What to do if you don’t get pre-approved and how to ask your mortgage lender why you were denied and how to make efforts to address those issues.

What is Pre-Approval?

A pre-approval letter tells you what a lender is tentatively willing to lend you— based on several financial documents and factors— which in turn gives sellers proof that you can afford the home you’re interested in. 

You don’t have to be pre-approved to make an offer, but it’s highly recommended. Unless your offer is all cash, it’s rare for sellers to accept your offer without it. It also gives you an idea of how much you will have to pay monthly towards a mortgage and how much you will need for a down payment.

What Do I Need to Get Pre-Approved?

Before heading to your appointment with your mortgage lender, it’s important to have the following information:

• Your credit score (printed from Credit Karma or similar)
• Proof of income (pay stubs from the past 30 days)
• W-2s 
• Identification (driver’s license or social security card)
• Your debt-to-income ratio (a comparison of how much you owe each month to how much you earn). To calculate this, add up all of your monthly payments and divide that total by your monthly gross income, multiplying it by 100 to convert it into a percentage. Bring this information in the form of a spreadsheet.

Your mortgage lender will use this information to determine the amount they are willing to lend you. 

What is Buying Power?

In real estate, buying power refers to how much house you can afford to purchase based on their income, assets, debts, and the mortgage rates available to you. When shopping for homes, you should stick within that range.

When you put in an offer and you’re already pre-approved, the process will go faster because the seller’s agent already has all of the information they need, avoiding unnecessary delays. 

First-Time Home Buyers in Vermont

A Vermont Housing Finance Agency (VHFA) loan could be a great option for first time home buyers or buyers who meet the income requirements. This gives you the opportunity for a smaller down payment, closing cost assistance, and 30-year fixed-rate mortgage loans. And, if you’re applying for a VHFA loan, you can get pre-approved with a lower credit score. 

To qualify for a VHFA loan, you need to have:

• Minimum two years of employment
• The ability to pay a 3.5 – 10% down payment
• A debt-to-income ratio less than 57%

Once you have all your ducks in a row, it’s time to get pre-approved!

How to Get Pre-Approved and What to Do Next

Armed with an understanding of what and how pre-approval means and works, it’s time to dive into the process:

1. Schedule an Appointment with Your Mortgage Lender.

If you’re a first-time buyer interested in taking advantage of a VHFA loan, you will need to select a mortgage lender that participates with the program. This list includes several banks, credit unions, and mortgage groups so you can find one that works best for you. If you’re not applying within the VHFA program, talk to your current bank or credit union to see if they will give you a loan. You can also contact other mortgage groups like Vermont Mortgage Company.

Wondering the difference between a mortgage broker and a bank? Generally, a mortgage broker can give you a wider range of options and streamline the mortgage process, but working with a bank gives you more control and costs less. A mortgage broker is an intermediary between you and lenders. Once you meet with them to discuss your needs, they contact direct lenders to find the best options for your specific situation. 

2. Gather Up Necessary Documents.

Bring all documentation listed in the “What Do I Need to Get Pre-Approved?” section. Before your appointment, look over these documents to familiarize yourself with them. Be sure to check your credit score to make sure it’s high enough to get pre-approved. The minimum is around 620 for typical pre-approval and about 580 under the VHFA program. If you’re not quite in this range yet, it might be helpful to pivot your focus towards improving your credit score before seeking pre-approval for a mortgage.

3. Receive Your Pre-Approval Letter and Start Home Shopping.

Your pre-approval letter will tell you roughly how much you can afford to pay for your home. This is the perfect time to connect with your Vermont Real Estate Company agent and start shopping for homes together! In the current real estate market, most listings are only “life” for short periods of time, so it’s important to try to be ahead of the crowd when it comes to a house you love. Consider and talk with your agent about the potential of offering over listing or what might happen in a bidding war. You want to make sure you give yourself room within your mortgage to offer higher than what the seller is asking for.

Keep in mind that with pre-approvals only lasting 60 – 90 days, so you need to shop efficiently before it expires. You can renew it at the end of your window, but each time your credit score is reviewed, it is likely to decrease.

What Happens if I Don’t Get Pre-Approved?

It’s common for potential buyers to not get pre-approved. Don’t feel discouraged! It just means you have to put in a little extra work to start the home-buying process.

First, ask the lender why you were denied. This will give you a clear picture of the effort you need to make to get pre-approved the next time you make an appointment. The most common reasons people are denied pre-approval are:

• Credit issues
• Recent changes in employment
• High debt-to-income ratio
• Loan or lender guidelines changed
• Unverifiable or lack of stable income

If it’s your credit score, work on paying off debts that will raise it and make timely payments. Consider debt consolidation as an option to help you lower your monthly payment and help improve your credit. 

If your debt-to-income ratio is bringing you down, negotiate a raise with your boss or look for a higher-paying job. The best thing you can do is work on budgeting and adding more to your savings so you don’t need to borrow as much money from your mortgage lender.

Getting pre-approved is an essential step in the home-buying process. While it may seem daunting, being pre-approved in this competitive buyer’s market puts you in a much stronger position. With a pre-approval letter in hand, you’ll know exactly how much home you can afford, and sellers will take your offers more seriously, knowing you are qualified and ready to move forward if you love their home.