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Homebuying Step #3: Get Pre-Approved for a Mortgage Loan - A Crucial Step in the Home-Buying Process

Learn how to get pre-approved for a mortgage loan. Understand the financial documents lenders need to determine eligibility

So you have found your agent, you've found your lender, and now it's time to get financing! Understanding the process of obtaining a mortgage loan can be overwhelming, but it doesn't have to be. One of the most important steps in securing a loan is getting pre-approved. Being pre-approved means that a lender has reviewed your financial information and approved you for a specific loan amount. But how do lenders determine loan eligibility, and what documents will you need to provide? In this article, I'll break down the basics of the pre-approval process and give you an idea of what you can expect when applying for a mortgage loan.

When qualifying for a mortgage loan, lenders start by reviewing your completed loan application and your financial documents. Both sets of information together will paint a picture of your financial position and will provide the information necessary to pre-approve your loan.
Lenders will then assess your ability to repay and will determine exactly how much you can afford. They want to know that your loan is a good risk and that your likelihood of default is low. Additionally, they will also ensure that your loan meets its lending policies and program guidelines.
Lenders will evaluate your loan based on four basic criteria. Let’s dive into what they are as well as what financial documents lenders will require from you.

Credit - One of the first things your lender will look at is your credit (credit score and credit history). A high credit score is viewed as an indicator that you pay your bills on time, don’t undertake too much debt and watch your spending. A low credit score is viewed as an indicator that you may fall behind on payments or you have a habit of taking on more debt than you can afford.
Credit affects interest rates. Typically, the higher your credit score, the lower your interest rate will be. Conversely, the lower your credit score, the higher your interest rate.

Income - There is no minimum amount, but your lender does need to know that you have enough income to support your mortgage payment as well as your existing debt obligations.
The income lenders will accept can take various forms. It doesn’t have to be a salary. Lenders will consider income as long as it is stable, predictable, and expected to continue. If you are applying with a co-applicant, income as well as debts from both may be factored.

Income is considered steady from a lender’s perspective if you’ve received it consistently from the same line of work or the same source over the last two years and if you expect to continue receiving it for the next three years.

Assets - Lenders will want to confirm that you have enough liquid assets to cover your down payment and closing costs, and that it is properly sourced. Lenders will need to document where your source of funds are coming from, as only verifiable assets are accepted. Be prepared to submit two months of bank/asset statements.

If your down payment will be coming from a donor, such as a parent, your lender will also need a gift letter from your donor clearly stating that it is a gift and not a loan that you will have to pay back. You will need to discuss if gift funds are allowable for your loan.

Collateral - Lenders will want to ensure that the home they're financing is in good condition and is worth the purchase price. They will require an appraisal on the home and will determine how much you’re allowed to borrow based on the appraised value. Lenders typically do not lend above the home’s value (unless it’s a specialty loan such as a renovation loan where the value increases upon completion).

If the appraisal comes in at or higher than the offer price, we’re in good shape. If it comes in lower than the offer price, you will have to make up the difference, or we will renegotiate the offer price
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