Getting pre-approved for a mortgage before you get serious about purchasing a home is a good first step in the process of becoming a homeowner. Doing so offers several advantages including:
- the ability to shop around for the best interest rates
- indicating to the seller that you’re serious about any offers you put on their home
- the assurance that you have a set amount of time — usually 60 to 90 days — during which the terms of the pre-approval are locked in
What’s Involved in Getting Pre-Approved for a Mortgage?
Think about getting pre-approved for a mortgage as what a lender considers to be a litmus test for your financial fitness. The lending institution that you work wants to make sure you can pay back the loan they extend to you. There are many factors lenders consider when determining pre-approval of your loan application and the terms they will offer you.
Credit History: A good credit history is one important indicator of loan repayment. Additionally, if you have a stable credit history, you could be offered better loan terms compared to someone who does not.
Credit Score: Your credit score is a tool used to demonstrate your ability to effectively manage your finances. A high credit score might make you eligible for a lower interest rate.
Employment History: The definition of a stable work history could differ depending on the financial institution. However, while not a deal breaker, there is no doubt that the longer you’re on the job the more favorable it may look to a lender reviewing your mortgage loan application.
Debt-to-Income Ratio: In order to provide homeowners with the best chance of paying their mortgage on time and as agreed, many lenders limit the ratio of debt to income that is acceptable. Several follow the “43 percent” rule which states that your debts shouldn’t take more than that amount of your income.
Income: The lending institution wants to make sure that the income you have is sufficient enough to pay the monthly mortgage payment on top of your existing bills and obligations.
Assets and Liabilities: Knowing the amount of money that you have tied up in liabilities and any assets that could be potentially liquidated is another factor that is taken into consideration.
Depending on the particular lender you use, there might be more emphasis on some of the factors and less on others.