How to Get Pre-Approved for a Mortgage

Proof of Identity

To get the process started, your mortgage loan officer will need to verify your identity and pull your credit report. This process can usually be done online by filling out required loan forms or via telephone with your mortgage loan officer.

It’s typically a good idea to check your credit history a few months in advance of applying for a home loan, so you can learn your credit score and dispute any inaccurate information. You can obtain your credit report at annualcreditreport.com and are entitled to one free report a year. Once you have ordered your credit report, be sure to review it for errors (read our “What is a Good Credit Score?” article to learn more).  Once you’ve done this, leave your credit alone and don’t make any big purchases or open new credit accounts until your home purchase is complete.

Proof of Assets

You’ll need to provide documentation of your assets, including cash held in checking and savings accounts. This will help verify that you have enough to cover your down payment, appraisals and inspections, the purchase of mortgage discount points if desired, any lender fees, and other closing costs. Your most recent bank statements will typically suffice and may be used to help prove both income and assets.

Proof of Income

Even with a small down payment or less than stellar credit, you may still get pre-approved for a home loan as long as the lender believes you can consistently make your monthly mortgage payments. Your most recent paystubs plus your past two years of tax returns and two years W2, if not self-employed, can help certify your income and help the lender determine how much mortgage you can afford.

Proof of Employment

In addition to your current paystubs, the lender will likely request a verification of employment directly from your employer, a couple days before closing.  If you are self-employed, a letter from your accountant may suffice, but you’ll also need to provide business tax returns and a profit and loss statement. If you aren’t employed, you’ll need to be able to show substantial, regular income from another source.

Proof of Credit-Worthiness

While you don’t have to display perfect credit to get pre-approved for a mortgage, the higher your score is the less interest you’ll typically pay. If your score is low, you may qualify for a loan backed by the Federal Housing Authority (FHA.) These also offer a lower down payment than the conventional 20%, but typically require you to carry private mortgage insurance (PMI.)

After checking your credit, your lender will explain how high your mortgage limit is, which types of mortgage loans you can apply for and what your down payment and interest rates will look like.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio compares your monthly debts to your monthly income. Your debts can include auto and student loans, revolving charge accounts, other lines of credit and your estimated mortgage payment. These are added then divided by your gross monthly income. The resulting percentage is your DTI ratio. Typically, lenders want to see a maximum DTI of 43% and prefer borrowers who have a DTI of 36% or less. The higher your DTI is, the more risk is involved with approving you for a mortgage. The lower your DTI is, the more competitive your interest rate may be.

Determine your DTI with the following calculator.

Loan-to-Value Ratio

Your loan-to-value (LTV) ratio compares your estimated loan amount to the value of the home you are considering purchasing. The loan amount is divided by the home value, which is determined by a property appraisal. Typically, lenders want to see an LTV no higher than 80%. However, as mentioned previously, there are programs that allow you to put less than 20% down. The higher your LTV is, the higher your down payment needs to be. If you can’t make a down payment of 20% or more, you will probably be required to purchased PMI. This private mortgage insurance helps protect the lender until your LTV decreases.

Determine your LTV with this calculator:

Getting preapproved helps you know what your home buying budget is well in advance of searching for a home. It can cut down on wasted time visiting open houses outside of your mortgage limit, and it can also prepare you for a strong negotiation stance with potential home sellers.