Advertising

What is a Mortgage Pre-Approval, and Why Should You Get One?

As the housing market remains volatile heading into 2024, getting pre-approved for a mortgage before making an offer on a new home can help you make a more substantial offer and navigate the homebuying process more smoothly. This article will explain what mortgage pre-approval is, why it’s beneficial, how to get pre-approved online for free, and key things to know for 2024.

What is Mortgage Pre-Approval?

Mortgage pre-approval is simply a process where a lender evaluates your financial details, such as income, debts, assets, and credit, to determine the maximum home loan amount you may qualify for and the estimated interest rate and monthly payment.

Advertising

With pre-approval, the lender is committed to lending to you for a set period (often 60-90 days) as long as your financial situation does not change. This allows homebuyers to make solid and competitive offers on properties knowing their budget and ability to get a loan.

Critical Benefits of Mortgage Pre-Approval:

  • Gives you a budget: Knowing the loan amount you qualify for sets your price range and prevents you from falling in love with a home you ultimately can’t afford.
  • Makes your offer stronger: Sellers prefer pre-approved buyers since there’s less risk of the deal falling through due to financing issues. This can help your offer stand out.
  • Saves time: The full loan underwriting and approval process has already started, so once you find a home, you can typically close faster than buyers without pre-approval.
  • Improves negotiating position: Being a robust and serious buyer with pre-approval in hand allows you to negotiate better terms rather than rushing to get a loan afterward.
  • Peace of mind: You’ll know what interest rates and payments to expect upfront rather than unknowns later in the process. This reduces stress throughout your home search.

So, in summary, mortgage pre-approval gives buyers confidence, leverage, and a competitive edge in today’s challenging housing environment. Getting pre-approved should always be one of the first steps when purchasing a home.

How to Get Pre-Approved Online for Free

The good news is that completing a mortgage pre-approval is now easier than ever, thanks to free online mortgage pre-approval options from many lenders. Here’s what to expect when getting pre-approved online at no cost:

Advertising

Provide Basic Income/Asset/Debt Information

Most online pre-approval applications will ask you to input details like your monthly income, current debts, credit history, current assets, and employment information. You’ll want documentation on hand, like recent pay stubs, bank/investment statements, etc., to reference.

Soft Credit Pull & Quick Underwriting Review

The lender will perform a “soft” or non-impacting credit pull to review your credit report without affecting your credit score. They’ll also conduct a preliminary underwriting review of your financial details.

Advertising

Receive Loan Estimate & Pre-Approval Letter

If approved, within a day or two, you’ll receive a Loan Estimate document outlining estimated loan terms and a formal Mortgage Pre-Approval Letter. Both can be downloaded, printed, or shared digitally.

No Upfront Fees or Obligation

The best part is that obtaining a free online pre-approval comes with absolutely no upfront fees or obligations. You’re not obligated to take out a loan with that lender, either.

So, in just a few minutes, you can gain clarity on your homebuying budget and receive documentation to provide confidence to sellers – all at no cost online. I’d recommend trying multiple lender’s pre-approval options to compare rates and services.

Comparing Mortgage Rates in 2024

With the Federal Reserve expected to continue increasing interest rates in 2023 and 2024 to cushion high inflation, now’s not the time to assume rates will remain low. Getting pre-approved with multiple lenders allows you to compare estimated interest rates upfront. Here’s a brief overview:

Current 30-Year Fixed-Rate Averages

As of November 2023, the national average 30-year fixed mortgage rate sits at around 7%. This is sharply higher than 2021 rate lows below 3%, so today’s buyers face significantly higher monthly payments and totals compared to recent years.

What Lenders Are Predicting

Most analysts expect 30-year fixed rates to average 6.5-7.5% through 2024 as the Fed keeps raising rates. However, things could shift rapidly based on inflation and economic data. Rates may decline later in 2024 if high inflation subsides.

Consider Other Loan Types

While 30-year fixed rates tend to get the most attention, you may qualify for cheaper rates on 15-year loans or adjustable rate mortgages (ARMs). Rates on these products are often 1-2% lower, so compare estimated payments.

Credit Score Affects Rates

The higher your credit score, the greater your chance of snagging a lower rate. Top-tier scores over 740 can qualify for rates 0.25-0.5% cheaper. Additionally, origination or “points” paid at closing impact rates too, so compare fees as well.

So in summary, while home loan rates remain elevated, shopping multiple pre-approvals early helps find the lowest available rate. With rates expected to average 6.5-7.5%, setting expectations is important when budgeting for a 2024 home purchase.

Factors Affecting Your Pre-Approval Amount

Many homebuyers assume the maximum loan amount they qualify for is predetermined, but several factors impact your pre-approval amount. Getting pre-approved involves more than just verifying income – a full underwriting review considers your overall financial profile. Here are some key things lenders examine:

Debt-to-Income Ratio (DTI)

Lenders watch your DTI closely, which compares monthly debt payments to gross monthly income. Front-end DTI covers housing costs, while back-end DTI adds other debts. Too high DTIs mean a risk of payment shock.

Credit History & Payment History

Payment performance on existing debts matters greatly. While scores over 620 typically qualify, higher scores over 740 allow debt ratios to stretch more. Derogatory marks like past dues lower amounts.

Down Payment & Reserves

The more cash you put down, the higher the loan amount. Lenders also want to see 1-3 months of expenses in easily accessed reserves beyond closing costs. High reserves ease underwriting.

Employment History

Stable long-term work looks safer than short-term jobs. Two consistent years in the same career field or industry strengthens applications during underwriting review.

Other Factors Like Assets/Liabilities

Assets like bank accounts, retirement funds, and investments offset other risks. Meanwhile, high liability balances like credit card limits work against qualifying for larger loans.

The most accurate pre-approval factors in all these issues. Having candid conversations with lenders before applying clarifies expectations before getting hopes up about the maximum amount.

Tips for a Smooth Pre-Approval Application

Applying for a mortgage pre-approval requires disclosing personal financial information, so preparing carefully leads to faster approvals. Here are some recommendations to set your pre-approval application up for success:

  • Gather documentation like recent pay stubs, W-2 forms, bank/asset statements, etc. beforehand
  • Be prepared to verify current employment details like start dates and pay rates
  • Have details on hand for monthly liabilities like credit cards, auto loans, student loans
  • Pull a copy of your credit report before to check for any errors to address
  • Consider applying simultaneously with multiple loan originators to compare offers
  • Choose a lender that specializes in your loan type (conventional, FHA, VA, etc.)
  • Ask any clarifying questions upfront so you fully understand the process
  • Provide prompt responses if the lender needs any follow-up documentation
  • Remain patient as full underwriting may take 1-2 business days, even for pre-approval

Double-checking your info and selecting a knowledgeable lender sets your pre-approval up to come back quickly with a solid estimated approval. Do your homework to breeze through smoothly.

Key Things to Know With 2024 Mortgage Pre-Approvals

As we enter the new year, here are five important factors to keep top of mind when pursuing mortgage pre-approval in 2024:

1. Rates May Continue Rising in 2024

While the pace of increases has slowed, most experts predict the Federal Reserve will continue raising interest rates in 2024 if inflation remains elevated. This means average mortgage rates could climb even higher from today’s 7% levels. Staying on top of rate trends aids planning.

2. Inventory Remains Constrained

The housing supply shortage means buyers may face bidding wars, waived contingencies, and higher prices. Being pre-approved demonstrates seriousness to sellers that may drive multiple offers. Consider expanding your search area if inventory is scarce locally.

3. Underwriting Guidelines Are Tighter

Lenders have stiffened standards in response to economic uncertainty. That makes things like large DTI ratios, lower credit scores, or minimal down payments more difficult. Having solid finances, credit, and cash reserves will help you clear underwriting hurdles. Confirm guidelines for any programs like FHA or VA with your lender.

4. Closing Times May Lengthen

Rising default risk and economic volatility have led to more scrutiny of loan files. Combined with high demand, expect the full home buying timeline from the offer to close to potentially stretch to 45-60 days rather than 30-45 days in a hot market. Leave appropriate buffers in your timelines.

5. Consider Adjustable Rate Mortgages

While fixed rates near 7% seem high, ARMs with lower introductory rates for 2-5 years could make sense if you intend to sell within five years, and rates may fall. Make sure to understand caps on future rates and payment changes if going this route.

Entering 2024, prospective buyers need patience and realism due to economic dynamics. With preparation and smart decision-making, though, achieving the dream of homeownership remains attainable. Staying informed aids in navigating the process smoothly.

Common Mortgage Pre-Approval Questions Answered

Here are answers to five frequently asked questions about the mortgage pre-approval process:

1. How long is a pre-approval valid for?

Most pre-approvals last 60-90 days. This allows time to find a home while assuring the lender your financial details, like income, have not substantially changed. Some flexibility is sometimes allowed if you need an extra 2-4 weeks.

2. Can I get pre-approved if my credit isn’t perfect?

Yes, most lenders will consider applicants with credit scores as low as 620, but you’ll pay a higher interest rate. Having scores over 740 opens better programs. Address any errors and work to raise your score before applying, if possible.

3. Is there a fee for pre-approval?

In most cases, no reputable lenders offer free pre-approvals online or in person as it allows them to build their pipeline. However, if you need a more complex review or manual underwriting, fees of $200-500 may apply.

4. Will it hurt my credit to get pre-approved?

No, the credit pull for pre-approval is a soft pull that doesn’t impact your credit score. However, once you apply for an actual mortgage loan, there will be a pretty hard credit pull that slightly impacts your score temporarily.

5. How firm are the numbers in my pre-approval?

Pre-approvals provide estimated maximum amounts and rates based on stated information. Your full approval is still subject to verification of W-2s or actual employment, assets on deposit, and final underwriting rules. Discuss contingencies with your lender.

With rates rising and housing inventory still tight, getting mortgage pre-approved is a prudent step to understand home affordability and strengthen any offers made. Let me know if any other mortgage pre-approval questions come up!

Advertising

Leave a Reply

Your email address will not be published. Required fields are marked *