A mortgage is a loan agreement between a lender and the borrower. It is typically used to purchase a property, but it can also be used for other purposes.
The mortgage agreement stipulates the size of the loan, its term, and the interest rate that will be charged by the lender. The borrower needs to make regular payments on this amount in order to pay back the loan in full over time.
Mortgages are important when house hunting because they allow you to buy your dream home without having to save up all of your money upfront.
Of course, one of the more convenient steps to buy a house as it relates to a mortgage is to get pre-approved for that mortgage. What does that even mean, though? We’ll explain it all in this article.
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How Does Mortgage Approval Even Work?
First, let’s look at how mortgage approval works at all.
Mortgage approval is a process which ensures that the borrower has a stable income, enough savings, and enough equity in their home.
Mortgage loan officers are the first step in mortgage approval. They can approve or decline a mortgage application based on the borrower’s financial situation.
The next step in mortgage approval is underwriting. This process ensures that the applicant meets all of the lender’s requirements and will be able to afford their new monthly payment.
Finally, mortgage closing is where the loan gets funded and closed on paper. The property seller signs over ownership to the buyer, who then becomes responsible for paying back the loan.
So, What Is Pre-Approval?
Mortgage pre-approvals are often requested before a home buyer decides to make an offer on a property. This is because mortgage pre-approval determines the amount of money that can be borrowed and it is a good indicator of how much house the buyer can afford.
Mortgage pre-approvals are usually done by filling out a credit application, which includes providing all income and employment details. The bank or lender will then decide if they will approve the loan based on the information provided in the application.
Pre-approval does not mean you have the loan right now. It just means you seem to be a good candidate for that loan based on the details on the application.
There is a hard-credit check that comes when you actually do go to request the loan for a home. Pre-approval saves time and shows sellers that you are for real.
How to Get Pre-Approved
There are a number of ways to get pre-approved for a mortgage. The first step is to find out how much you can afford in monthly payments. You can use an online calculator to determine this.
The next step is to find out what your credit score is and what your debt-to-income ratio is. Your credit score will determine whether or not you will be approved for a mortgage and the interest rate that you will be given.
The debt-to-income ratio tells the lender how much money you make compared with how much money goes toward your monthly expenses (including your mortgage).
The pre-approval application form will request lots of information, such as bank statements, tax forms, pay stubs, and the like.
Ultimately, just know that getting pre-approved for a mortgage is a great idea and will only help you in the end when you’re buying a house.