Mortgage pre-approval is the process of determining if a borrower can afford a new mortgage debt. The lender looks through a borrower’s income, assets and credit history and determines if a new mortgage debt can be paid in full, as well as what mortgage amount the borrower can afford. Prior to procuring a mortgage pre-approval, there are a few steps that a borrower can take to make the process smoother and optimize chances for approval.
Credit Score and Report
One of the biggest determining factors in a mortgage pre-approval is a borrower’s credit score and report. By reviewing your credit report prior to applying for a mortgage pre-approval, you can ensure that certain problems with approval are avoided. For example, any judgments or liens listed on a credit report must be paid in full prior to procuring a new mortgage debt.
Review your credit report and report any errors immediately to the credit bureau to ensure that the errors do not negatively impact your score. Most lenders approve a borrower with a credit score of 620 or above, with some approving a borrower with a credit score as low as 580. However, borrowers with high credit scores receive the most favorable interest rates. Raise your credit score by paying down your revolving lines of credit, such as credit cards, to less than 30 percent of their limit. This lowers your credit use and raises your credit score.
Uniform Residential Loan Application
In order to pre-approve a borrower, a lender needs a completed mortgage application, known as a Uniform Residential Loan Application. The most important items on this application to the lender are the borrower’s full legal name, date of birth, social security number and two year’s worth of residence, income and employment history. This information allows the lender to not only check a borrower’s credit, but to quickly calculate eligibility levels and amounts.
The required documentation for a mortgage pre-approval varies based upon the mortgage program; however, most mortgage programs require a minimum of two month’s worth of pay stubs and bank statements for each borrower listed on the application. A copy of a photo ID for each borrower will be required as well. Additionally, two year’s worth of income taxes or W-2s may be required. If the borrower is involved in any type of child support or alimony payment, divorce decrees will be required as well. Lastly, if income is received from retirement accounts or social security, documentation will be required to prove the continuation of this income for a minimum of a two-year period after application.
Federal Reserve: Understanding the Home Mortgage Process
Freddie Mac: Mortgage Application Checklist
Fannie Mae: Uniform Residential Loan Application