Understanding Mortgage Pre-Approval
There is a lot of misunderstanding about pre-approval, and at LBC Mortgage we’re here to help you address it. The “pre” in front of “approval” stands for preliminary, as the lender still needs to verify all of your information before issuing a final approval prior to closing.
A mortgage preapproval helps you understand how much you can afford to spend on a home, based on your finances and the lender’s criteria. Many lenders offer online preapproval, and in many cases you can receive it within a day. We’ll explain how and when to get preapproved, so you’re prepared to make a smart and competitive offer once you find your dream home.
A mortgage preapproval is a written statement from a lender confirming that you qualify to borrow a certain amount of money for a home purchase. Your preapproval amount is determined by reviewing your credit history, credit scores, income, debt, and assets.
A mortgage preapproval offers several benefits, including:
- Giving you a general budget for your home purchase
- Showing the mortgage rate you may qualify for
- Checking a box that many real estate agents require before agreeing to work with you
- Assuring sellers that your offer is serious and that you can secure financing
A mortgage preapproval is typically valid for 60 to 90 days. If it expires, you’ll need to reapply and go through the process again, which may involve another credit check and updated documentation.
Lenders want to ensure that your financial situation hasn’t changed—or, if it has, that they can factor those changes in before agreeing to lend you money. At LBC Mortgage, we offer a high standard of pre-approval by carefully evaluating all key factors, including your income, debt, and credit profile.
Documents Needed for A Mortgage Pre-Approval
The list below may seem extensive, but there’s no need to worry. Our specialists at LBC Mortgage will guide you through your specific situation and help resolve any documentation-related issues. Even in the most unique cases, we’ll find the optimal path to homeownership.
Tax returns from previous two years
To verify the consistency of your income and employment, banks need to review copies of your tax returns from the past two years. This applies whether you’re self-employed or working as an employee.
Many mortgage programs require at least 24 months of consecutive income. Ideally, you should stay with the same employer during this period. However, if you change jobs, a lender may still approve your mortgage as long as you’ve been working in the same field for two consecutive years. Be sure to make copies of your returns and provide them to your mortgage lender.
Paycheck stub or Profit and Loss statement
A mortgage lender not only needs copies of your tax returns from the previous two years—they also require recent income information. This confirms that you’re still employed and that your income hasn’t changed significantly from the previous year. If you’re an employee, you’ll need to submit your most recent paycheck stub, so make sure you keep this document after receiving your paycheck.
If you’re self-employed, you will likely need to submit a year-to-date Profit and Loss statement. This shows your business income for the year so far and confirms that your current income remains sufficient for mortgage approval.
Proof of rental income
If you receive monthly income from a rental property and want to use this income for qualifying purposes, you’ll need to provide details about the property. This includes the address of the property and a copy of the tenant’s lease. Your lender will use this information to verify the amount you receive in rental income each month. Keep in mind that the bank will also compare this information with what you’ve reported as rental income on your tax return.
Financial account statements
Buying a property is expensive, and you’ll have a number of out-of-pocket expenses. Today, many mortgage programs require a down payment. This amount can range from 3 percent to 5 percent of the sale price, depending on whether you choose a conventional or FHA home loan.
In addition to this, you’re responsible for closing costs, which can add another 2 percent to 5 percent of the loan amount. Therefore, buying a house requires some level of cash reserves. Before approving your mortgage, lenders need to verify the source of funds you’ll use to cover these expenses.
Rental history letter
If you rent an apartment or house, this monthly payment might not appear on your credit report. Some mortgage lenders request information about your rental history, so you may need to ask your landlord for a letter confirming a good payment record.
A reliable tenant who pays rent on time builds a lender’s confidence. In most cases, you’ll also pay your mortgage on time—especially if the payment is comparable to what you paid in rent.
Credit report (monthly debt payments)
Mortgage lenders also review your credit reports to evaluate your monthly debt obligations when determining whether you qualify for a mortgage. This also helps determine your pre-approval amount. They’ll compare your minimum monthly debt payments with your monthly income to assess affordability.
Typically, your mortgage payment should not exceed 28 percent to 31 percent of your gross monthly income. Your total monthly debt payments, including the mortgage, should not exceed 36 percent to 43 percent of your gross monthly income. To calculate your debt-to-income ratio, the lender will pull copies of your credit report.
Copies of any court orders
When applying for a mortgage, you can also use alimony and child support payments for qualifying purposes. However, your lender will request copies of your divorce decree or other court orders to verify the amount you receive.
There are strict rules regarding the use of child support or alimony when buying a home. In most cases, you must have received these payments for at least six months before qualifying, and they must continue for at least three years after closing.
Down payment gift letter
If you’re using gift funds for your down payment and/or closing costs, you must provide your lender with a gift letter. These letters include information about the donor, the amount of the gift, and a statement confirming that the funds are a “gift,” meaning no repayment is expected.
Copy of your driver’s license and Social Security card
Mortgage fraud is a real concern. To prevent this, your lender may require a copy of your driver’s license or other state-issued ID, along with a copy of your Social Security card. This procedure helps the bank verufy your identity.
Get Pre-Approved with LBC Mortgage
Getting a mortgage involves quite a bit of paperwork and documentation. Even if you feel like you’ve already provided everything your lender needs, the underwriter may still reach out and request additional information. That’s why it’s important to work with the experienced professionals at LBC Mortgage.
We carefully analyze your financial situation and explore all available options through our extensive network of lenders. Our team will help you prepare your documentation and provide a realistic assessment of your plans. Using the latest technology and tools, we make the process smoother and faster. Contact us today for a free consultation and take the first step toward pre-approval and closing.
