Preapproval Deep Dive

The first step in receiving a mortgage from a lender is preapproval. While you might think that preapproval is just a formality, in the world of mortgages it is not. However, before you can even get preapproved, you need to understand just what the lenders are looking at and judging your approval on. There are many factors that they weigh when deciding if someone should get preapproved.

What does a lender look at when they are thinking about approving someone? Firstly, lenders examine income, which is the dollar amount that you make in a year. Obviously, a lender isn’t going to give a loan to someone who won’t be able to pay it back over time. The lender needs to know that you have enough money coming in to cover your monthly payments. The lender will also investigate your employment history, your monthly household income (the income of both you and your spouse or partner), plus any other form of income that you have such as child support or alimony payments.

After that, the lender will examine the type of property you hope to buy. The type of property you are purchasing will affect the type of loan you can get. This happens because different types of homes have different risks and things to look out for. For example, if you purchase a small single-family home, you will likely get a better deal because the lender knows there is less risk for them and more chance of you being able to pay back the loan. If you are buying a larger house, or a house that needs a lot of work, your deal will not be as favorable because there is more risk involved for the mortgage lender.

If you are looking to buy an investment property, your possible mortgage lender will definitely be more hesitant and will likely create a pretty strict and consequential mortgage plan for you. This is because if you are buying an investment property, it’s likely that you already own a home for yourself and your family. Therefore, your investment property will not be as important to you as your actual home. It stands to reason that maybe there is less of a chance of paying off your loan if that is the case. That’s why a mortgage lender isn’t going to go easy on you with a mortgage for an investment property.

The lender will also look at the assets you own when you are shopping for a mortgage. Assets are essential items and property that you own that are worth money. Having a lot of assets ensures the lender that you will still be able to make your payment no matter what. If you run into financial problems, you can always make the hard choice of putting your assets up for sale. In fact, a bank would force you to do just that if you couldn’t make one of your monthly mortgage payments. Aside from property, some examples of assets are savings accounts, retirement accounts, and taxable investment accounts.

Finally, credit is another thing that lenders look to when they are contemplating a mortgage loan to you. Of course you have heard of credit before, and there is a good chance you have had your credit checked in the past. If you have rented an apartment, bought a car, or even purchased a cell phone, you have had a credit check run on you. Your mortgage lender is going to go very deep into your credit history. This plays a major part in your chances of securing a mortgage. The higher your credit, the better mortgage you will receive. Generally, it is thought that you need at least a 580 to 620 credit score to get a government-backed loan. If you want a loan that is better than that, you need a score to match it. If your credit score is low, you will want to spend some time improving it before you start shopping for your dream home.

When you are getting preapproved, you will have to provide your mortgage lender with a lot of documents so they can do the proper investigating that needs to happen. First and foremost, you will need to have your proof of income ready for your lender. This means you need at least two years of federal tax forms, W-2s, pay stubs, any divorce or child support decrees, and documentation of any type of income for at least 6 months. That’s not all, there may be more documents that are needed and your mortgage lender will notify you of everything it requires before preapproval.