Mortgage pre-approval advice to give to your new clients

Mortgage pre-approval is one of the initial steps that most prospective homebuyers will take on their journey to homeownership. It can also make a mortgage broker’s work smoother by reducing delays and filtering out clients who might not yet be ready. You can say that those who are pre-approved are more prepared, more confident, and more likely to close.

In this article, Mortgage Professional America will explore what you need to know about mortgage pre-approval. We will discuss how it benefits your clients and what they need to be pre-approved. Is it common to be denied a mortgage after pre-approval? Will mortgage pre-approval will hurt your clients’ credit scores? Read on to find out.

What is mortgage pre-approval?

Mortgage pre-approval is a process where a bank or mortgage lender reviews a homebuyer’s finances. The mortgage provider will conduct this review to decide how much they’re willing to lend. If approved, the homebuyer will get a pre-approval letter that shows how much they can borrow.

This letter helps them shop for homes within budget and makes their offer more attractive to sellers. It shows mortgage providers one’s seriousness about their pursuit, but it can also give them bargaining power if there is a bidding war.

Mortgage pre-approval isn’t a final home loan offer. However, it can tell the bank or mortgage lender if the borrower is financially prepared to buy their first home. It acts as a sort of dress rehearsal for when your clients are eventually approved for a mortgage.

Watch this video to learn more about mortgage pre-approval:

Do you have ambitions such as becoming one of the best in the mortgage industry? Knowing the importance of a mortgage pre-approval is vital to guiding your clients successfully through the homebuying process.

What does a mortgage pre-approval determine?

Using your clients’ employment history, credit score, and their chosen property, the mortgage pre-approval process will determine the following:

• the maximum property loan amount your clients qualify for
• what your clients’ estimated monthly payments will be
• what your clients’ mortgage interest rate will be

Is it a good idea to get pre-approved for a mortgage?

Definitely. One benefit of mortgage pre-approval is that it helps your clients know what price range they can afford before they start shopping for homes. In other words, by undergoing the mortgage pre-approval process, they can avoid sticker shock. This is especially true if they are a first-time homebuyer.

But that’s not all. Here are two benefits of getting mortgage pre-approval:

1. it makes budgeting easier
2. it gives your clients more credibility

Let’s take a closer look at these two:

1. It makes budgeting easier

Once your clients know how much they qualify for, they can start planning their finances to pay for their monthly mortgage payments. The down payment can be one of the biggest expenses and will have an impact on the budget.

But after that’s settled, your clients will gain a better understanding of how to prepare for other household requirements and expenses. This also includes budgeting for closing costs. One common mistake many homebuyers make is not factoring in these costs when calculating overall home affordability.

With mortgage pre-approval, your clients are more likely to consider these additional expenses. This will  also enable them to plan better.

2. It gives your clients more credibility

Mortgage pre-approval shows financial stability and acts as a reminder to sellers that your clients are credible property buyers with serious intent. It can also provide them with more negotiating power and an advantage in bidding wars where multiple offers are made on the same home.

What do you need to be pre-approved for a mortgage?

To be pre-approved for a mortgage, your clients need to finish a mortgage application and give proof of:

• assets
• income
• good credit
• employment
• other important financial documentation

Depending on the type of mortgage loan, your clients’ mortgage pre-approval is based on various factors such as their debt-to-income (DTI) ratio and their credit scores.

The following is a list of the documentation requirements that your clients must show to get mortgage pre-approval from a bank or mortgage lender:

1. proof of income
2. proof of assets
3. strong credit
4. employment verification
5. other documentation

Let’s take a closer look at the requirements to be pre-approved for a mortgage:

1. Proof of income

When purchasing property, your clients will have to provide W-2 forms and tax returns from the previous two years. They'll have to provide any pay stubs that can prove income and year-to-date income. They must also show proof if they have other sources of income like bonuses or alimony.

2. Proof of assets

Your clients’ bank and investment account statements can prove that they have the funds needed for a down payment. These can also show that they have enough cash reserves and budget for closing costs.

The down payment depends on the type of mortgage that your clients will get. For instance, conventional loans will require them to make a down payment of at least 20 percent of the property’s purchase price to avoid paying for private mortgage insurance (PMI).

3. Strong credit

For a conventional home loan, many banks and mortgage lenders will require a FICO score of at least 620 or more for approval. On the other hand, mortgage companies will require a FICO score of 580 for a Federal Housing Administration (FHA) loan.

Having a credit score of 760 or more can help your clients secure the best possible rate at the mortgage pre-approval stage.

4. Employment verification

Banks and mortgage lenders will verify your clients’ employment by reviewing their pay stubs. They can also contact the homebuyers’ employer to confirm job status and salary. If your clients are self-employed, they’ll need to provide more details such as:

• how stable their income is
• where their business operates
• what type of work the business does
• how strong the business finances are
• whether the business earns enough to support regular mortgage payments

This will help the bank or mortgage lender decide if your clients can afford the property loan.

5. Other documentation

Mortgage pre-approval also requires personal identification and documentation to allow the home loan provider to review your clients’ credit report. This can include:

• driver’s license
• Social Security number
• authorization

Difference between mortgage pre-approval and pre-qualification

Many homebuyers might get confused when talking about mortgage pre-qualification and pre-approval. As a mortgage broker, you must explain the difference early on.

Mortgage pre-qualification is a basic estimate based on your clients’ financial details. However, it doesn’t involve document checks or a credit pull.

On the contrary, mortgage pre-approval is a more complete process. Your clients will be asked to submit documents like pay stubs and tax returns. The bank or mortgage lender will also run a credit check. If approved, your clients get a pre-approval letter showing how much they can likely borrow.

Mortgage pre-approval can also help reduce surprises during underwriting and it gives homebuyers a stronger position when making an offer. Helping your clients get pre-approved for a home loan establishes your brand as capable and reliable.

Watch this short clip to learn more about the difference between mortgage pre-approval and pre-qualification:

A mortgage pre-approval can determine the highest loan amount your clients can get approved for. But what if your clients want to see an estimate of their monthly mortgage payments? In that case, you’ll need a mortgage calculator. Lucky for you, our mortgage calculator is free to use! Check it out to help your clients estimate payments and better prepare for their home purchase.

How far in advance can you get pre-approved for a mortgage?

It would be best for your clients to get pre-approved for a mortgage at least 90 days before buying a home. Mortgage pre-approvals can only last a few months. It would be counterproductive if they get a pre-approval letter before they’re ready to buy property.

They could end up having to go through the process all over again if they wait too long and the letter expires. Remind your clients that most pre-approval letters are usually valid for 60 to 90 days.

Is it common to be denied a mortgage after pre-approval?

Yes, your clients can still be denied after getting mortgage pre-approval. This happens because the home loan must go through underwriting before it is finalized. During underwriting, the bank or mortgage lender takes a closer look at the borrower’s finances to decide whether to approve the home loan. If your clients’ financial situation has changed, the mortgage lender might deny the application, even with a pre-approval letter.

Finally, mortgage pre-approval does come with risks. It can have an impact on credit scores and it doesn’t guarantee that your clients will ultimately be approved for a mortgage. Still, it’s often the first necessary step to securing a mortgage and purchasing a home. It’s critical for your clients to understand what’s required to get pre-approved. Then, you can do your part by helping them manage the process wisely.

Do you have previous clients who got pre-approved for a mortgage? How has the experience been for them? Let us know in the comments below.