How to know you鈥檙e mortgage preapproval worthy
It鈥檚 the biggest hack to homeownership, and probably the most misunderstood: a home loan preapproval. How do you know when you鈥檙e financially set to get preapproved? Here鈥檚 what lenders look for and what you need to do if you鈥檙e not quite there.
What you need for a mortgage preapproval
Unlike a聽, a preapproval is more than just a conversation with a lender. You鈥檒l have to submit quite a bit of paperwork, including employment verification and checking, savings and investment records. The lender will pull a credit report on you.
The elements lenders look for in mortgage preapproval are the same industrywide:
- A minimum two-year employment history in the same job or field.
- A credit score of 620 or higher (in most cases).
- A savings track record.
- Financial asset records.
- Proof of down payment (3% to 20% of the home price, depending on the loan program).
- An 鈥渁ll-in鈥� debt-to-income ratio of 43% or less.
Usually, there鈥檚 no charge to apply for a mortgage and gain a preapproval, though some lenders will seek reimbursement for the fee to pull your credit.
Job and credit history
The two-year employment history rule has a little leeway; for example, if you are a recent graduate and have proof of future income from your employer. However, transitioning from a W-2 pay stub job to self-employment 鈥� without a two-year track record for your new business 鈥� is a 鈥渄efinite hard stop in today鈥檚 mortgage world,鈥� Don Bleuenstein, national sales director of retail home lending with Flagstar Bank in Troy, Michigan, tells NerdWallet.
He says a credit score of at least 620 is a 鈥渇airly hard rule.鈥� But your聽, which you can often obtain free of charge from a credit card company or bank, may not tell the whole story. While it鈥檚 hard to crack the code of all the different credit score models, Bleuenstein says that, in his experience, credit scores used for mortgages are tougher than the consumer credit FICO scores that have become readily available.
This may be because for mortgage credit scores, it is your middle score that counts among the three providers, TransUnion, Equifax and Experian.
Also, you probably can鈥檛 count on your spouse鈥檚 or partner鈥檚 pristine credit score if the home will be in both your names. With two or more borrowers, the worst scoring party鈥檚 middle score is used, Bleuenstein says.
Assets and down payment
鈥淭he ability to budget and save shows financial discipline,鈥� says Staci Titsworth, regional manager for PNC Mortgage in Pittsburgh. 鈥淪ometimes clients receive gift money, and that鈥檚 fine, or they get a big bonus, and that鈥檚 great. We just have to show the underwriter the source of where those monies came from and that the monies were not borrowed.鈥�
However, lenders know we don鈥檛 live in an ideal world, she says.
鈥淟et鈥檚 face it, nobody鈥檚 perfect,鈥� Titsworth says. 鈥淟ife is not perfect. There are bumps in the road. People lose jobs; people experience job changes. People have unexpected expenses that they have to dip into their savings for. With that, it鈥檚 all about the documentation. It鈥檚 all about presenting their information to the underwriter that explains the financial ability to repay the mortgage.鈥�
Debt and income
As for debt and income, Bleuenstein says lenders are looking for a debt-to-income ratio of 43% or less. That amount, called a聽, includes your mortgage payment.
鈥淪o if you make $10,000 a month gross [before taxes], $4,300 is what all of your debt on your credit report needs to be under,鈥� he says, including your future house payment, monthly property taxes and homeowners鈥� insurance as well as your credit card, student loan and/or car payments.
But the numbers have a little wiggle room. Say your DTI is a bit high, perhaps 46%, but you鈥檝e got a good credit score 鈥� for example, somewhere around 700 鈥� and you have a 5% down payment in the bank; in that case you probably would get mortgage preapproval, Bleuenstein says.
When to start the mortgage preapproval process
Seeking a preapproval long before you start house hunting will accomplish one important goal: alerting you to any qualifying issues you may not be aware of.
鈥淲hat鈥檚 prudent is: Get preapproved now if you think you鈥檙e going to buy in the next year,鈥� so you have time to fix any glitches, Titsworth says. Although preapprovals are usually valid for only 60 to 90 days, a lender will extend them if you update information about your聽.
And once you get mortgage preapproval, you can confidently shop for a home.
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email:聽hal@nerdwallet.com. Twitter:聽.
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