There are many important reasons to get pre-approved:
- To Find Out How Much You Can Afford - If you are getting a loan, it is important to get an accurate idea of how much you can afford. You might be able to afford more or less than you think, and you don't want to waste your time looking at homes outside of your price range.
- A pre-approval letter makes your offer much stronger when you finally find your dream home. Sellers do not want to take their home off the market and waste their time if they do not know that you will most likely be able to get a loan. Without a pre-approval, your offer will not be taken as seriously.
Documents you'll typically need to provide to get a pre-approval:
- Your W2 from the past 2 years
- Your paystubs from the past 3 months
- Your tax returns from the past 2 years
- Your checking or savings bank statements from the past 3 months (proof of down payment funds)
- Your statements for all assets (stocks, bonds, retirement accounts) from the last 2 months
- The name and phone number of your landlord (if you are are a renter) or your current mortgage documents if you already own a home
- Your divorcee decree, if applicable
- If you are self-employed: Your business tax returns from the past 2 years, in addition to your year-to-date profit and loss statement, and year-to-date balance sheet
The lender will also need to pull your credit report/score for you and any co-borrowers. They will look in your credit report for red flags such as missed payments and high overall debt. Generally, a score over 720 will get you the most competitive mortgage interest rates.
If you don't get pre-approved, there are a few things you can usually do to help:
- Correcting errors on your credit report and/or raising your credit score
- Decreasing your overall debt and improving your debt-to-income ratio
- Increasing your down payment amount
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