So you’re ready to take the next step in homeownership.

Whether you’re a first-time homebuyer, in search of your forever home, or looking to downsize, an important first step in the homebuying process is getting pre-approved for a mortgage.

Assuming you’re not one of the very few people able to pay cash for a house, you’ll need to borrow money in order to buy.

Getting pre-approval for a mortgage has several benefits. It proves that you are a worthy candidate for borrowing and that you’re financially able to own a home. It also shows real estate agents and sellers that you’re serious about buying, and that you’re ready to go when you find the right house. In fact, in this booming real estate market, some sellers won’t show homes to potential buyers without a pre-approval letter.

In short, a mortgage pre-approval is an offer from a lender to you as the buyer. You will receive a pre-approval letter, including the amount and specific conditions of the loan, that you can attach to any offers you make throughout the homebuying process.

Items Needed for Pre-Approval

To consider you for pre-approval, mortgage lenders will require you to gather several documents and other information, including:

• Identification information: Name, date of birth, addresses, social security number, license, marital status, and number of dependents all needs to be provided to your lender.
• Employment information: Lenders will ask you to provide names and contact information of current and previous employers, employment dates, and monthly income.
• Financial information: Lenders will request statements and other information regarding your bank and investment accounts.
• Tax documents: You will be required to present income tax returns and W-2 tax returns from the previous two years, as well as 1099s, if applicable.
• Credit history: You will want to request copies of your credit reports. If any issues are revealed that need to be resolved, do so before applying for pre-approval.
• Credit score: You are entitled to a free credit score once every year from each of the three national credit reporting agencies. Most lenders require a score of 620 or higher, but typically the lowest mortgage interest rates are reserved for those who have credit scores of at least 760.
• Debt-to-income ratio: The percentage that represents how your monthly debt payments compare to your overall gross monthly income is called debt-to-income ratio. Gross income is the amount of money you earn before taxes and other deductions. Debt payments include mortgages, auto loans, student loans, medical debt, credit card debt, and personal loans. This number is important because mortgage lenders want to minimize the risk of borrowers defaulting on the loan.

Pre-Approval is Not a Guarantee

Life doesn’t come with guarantees and the homebuying process is no exception. A mortgage pre-approval is not a promise that you will be given a particular loan. Although not a common occurrence, your mortgage can still be denied even if you receive pre-approval.

Following pre-approval, lenders will take a deeper look into your finances, your debt and the amount of taxes you would pay on the new home. It’s possible lenders may decide to offer you less than the pre-approval. Or, if your situation changes in any way between pre-approval and applying for a mortgage—such as changes in your employment status—your mortgage offer can end up coming in higher or lower than your pre-approval indicated.

Some Parting Thoughts

Securing pre-approval for a mortgage is beneficial for all parties involved. In addition to showing realtors and sellers you are serious about buying, it shows you how much you can afford to spend on your next home sweet home.

At Sunrise Banks, we believe homeownership should be an option for everyone. Learn more about our variety of loan solutions to meet your specific needs, including lender credits to help with closing costs and down payment assistance.