Before you start looking for a home, it’s important to get preapproved for a mortgage first. This process can help buyers gain an edge in the housing market and show that you're a serious contender.
A mortgage is a loan that's used to purchase a home. It's typically made up of:
- Principal: The amount of money you borrow to buy your home.
- Interest: The cost you pay to borrow from your lender, expressed as a percentage.
- Term: The length of time you'll repay the loan.
- Taxes: It's usually one-twelfth of the estimated annual property taxes on your purchased home.
- Home insurance: Protects you and your lender from fire or flood damage. It also protects you from other liabilities, such as injury to a visitor to your home or additional damage to your property.
- Other fees: Might include Homeowners Association (HOA) dues or mortgage insurance, depending on your loan type.
These components combined determine your monthly payment and total cost of your loan. This is how terms and down payments will impact your costs:
- Interest rates: A small change in rates can affect your monthly payment and the total interest paid. For instance, a quarter-point decrease in the 30-year fixed mortgage average could save the borrower as much as $70, according to data from loanDepot, a nonbank holding company that sells mortgage and non-mortgage lending products.
- Loan terms: Shorter terms mean higher monthly payments but less interest over the life of the loan. Longer terms like 30-year mortgages have lower payments but increase total interest.
- Down payment: A bigger down payment could help reduce your loan amount and help you qualify for a lower interest rate. It would also lower your loan-to-value (LTV) ratio. This is how lenders assess your lending risks.
Every listing on Homes.com includes an affordability calculator. You can adjust your down payment, interest rate and loan term to see different financial scenarios. The calculator uses real estate data to provide a property-specific breakdown of estimated taxes, HOA fees and homeowners insurance.
Once you have explored your options, let Homes.com guide you through the preapproval process, from understanding the difference between mortgage prequalification and preapproval to securing a mortgage loan.
1. Get prequalified or preapproved for the loan
Mortgage prequalification: This is a preliminary step that gives a potential borrower a rough estimate of how much they’ll be able to borrow for a home loan. It’s all based on the information you provided the lender about your credit, income and assets. Some lenders will do a soft credit check during this process. This could take a few minutes to complete and a decision can often be made quickly.
Mortgage preapproval: This formal process that involves a thorough review of your financials. Lenders typically review three main things: income, assets and credit. Lenders will do a credit check.
Documents needed for preapproval:
- Photo ID
- Pay stubs, W-2s and tax returns (typically last two years)
- Recent bank and investment statements
- Credit report
- Additional documents as needed (gift letters, rent payment records, divorce papers, proof of other income)
If approved, you’ll receive a preapproval letter that includes the interest rate, amount and term of the maximum amount you’re eligible for. However, some lenders might not tell you the highest amount you can borrow, said Baret Kechian, a branch manager at loanDepot. The goal is to help buyers look at properties within a realistic budget, not just a theoretical maximum. This can help the borrower and the real estate agent find a home that best suits the buyer’s financial situation, Kechian said. Keep in mind, when you’re ready to make an offer, the seller or agent might want to see your preapproval letter to ensure you’re financially suited. It’s important to note that mortgage preapproval isn’t a total commitment; it might be worth shopping around and getting a few competitive options. Since the lender pulls your credit score, you may be limited to how many lenders you consult.
Last, preapproved letters include an expiration date, usually between 60 and 90 days. If you haven’t found a home, you could ask for a renewal to ensure your preapproval remains valid. But remember that neither preapproval nor prequalification is a guaranteed home loan offer.
2. Submit documents for underwriting
Mortgage underwriting is the part that happens behind the scenes once you submit your mortgage application. This is when the lenders scrutinize your credit and financial background to see if you are eligible for a loan.
“Basically, the lender wants to make sure you’re able to handle the mortgage payments and that the house is worth what you’re paying for it,” Wells Fargo’s market manager Eric Gotsch told Homes.com.
Documents needed for mortgage application:
- ID and Social Security number
- Pay stubs from the last 30 days
- W-2s or I-9s from the past two years
- Proof of other sources of income
- Federal tax returns
- Bank statements or documentation of other assets
- Details of long-term debt, such as car or student loans
- Housing property information/ accepted offer to purchase (must be signed by all parties)/ housing appraisal if necessary
Remember, there can be delays due to missing documents or unclear income sources/ assets. Unique properties like co-operatives (co-ops) and condos may require extra review.
3. Review and sign disclosure
The underwriter reviews all the documentation you and your loan officer have provided, such as your income, assets and liabilities. They check that the details on your application match your pay stubs, bank statements, credit history and other supporting documents. This is to ensure you meet the lender’s requirements for the loan.
Your credit score is crucial for loan pricing. Underwriters will look for red flags, and they may manually review your credit history for issues such as collections, judgments, bankruptcies, or foreclosures.
As part of this process, they will calculate your debt-to-income ratio (DTI) to see if you can afford the monthly mortgage payment. Most lenders want your total debts, including the new mortgage, to be less than 43% of gross income but it can go up to 50% for some loans, Kechian said.
For most loans, up to $1.25 million, underwriting is automated by Fannie Mae and Freddie Mac systems, according to Kechian. The underwriter then validates the automated results and checks the backup documentation.
If everything checks out, the underwriter will give a “clear to close,” which means you’re approved and can proceed to closing.
Before the final signing, you’ll receive a closing disclosure at least three days prior to closing. This document contains the finalized figures: actualized costs from the title company, attorney fees, recording fees, taxes and what both buyer and seller are responsible for. Potential borrowers will need to review and sign the disclosure before closing.
Final signing stage
At closing, you’ll sign a package of documents that could be at least 60 pages. Some documents can be signed electronically, but others may require a physical signature. Depending on your state, the attorney or title company will walk you through all the paperwork.
You’ll need to bring a check for the final amount due. The exact figure is usually provided a day or two before closing. The title company distributes this check to the seller, third parties and for recording fees. The title company is responsible for getting the final figures, including HOA fees, moving costs and tax adjustments, according to Kechian. Any changes to loan terms require updated disclosures and may trigger a waiting period.
It’s important to note that in some states, the closing date is a hard deadline. If you don’t meet it, you’ll need to request an extension. In states like New York and New Jersey, attorneys are involved for both buyer and lender, which can add extra expenses and steps.