How to get pre-approved for home loans

If you are in the market for a new property, securing the funds for the purchase may not be on top of your things to do. Most buyers mistakenly believe they need to start the home loan process only after finding their dream house.

However, if you want to come across as a serious buyer and show realtors and sellers that you mean business, you may be better off with pre-approved home loans in your kitty. Getting pre-approved gives you an idea of how much you can afford and helps narrow down the search.

Here’s everything you need to know about getting pre-approved home loans:

A home loan pre-approval refers to a preliminary evaluation of a borrower’s eligibility to get a loan. If you are pre-approved for a loan, then you get the funds as soon as you apply. While the lender commits to extending a loan to you, the final amount may not be as much as you want to borrow. The advantage of a pre-approval is that you don’t need to have a firm purchase contract with the seller in place -- you can get pre-approved as soon as you decide that you want to buy a house.

A lender considers your financial profile, income status, current assets and liabilities, and credit score for pre-approving your loan application. If you are a first-time home buyer, getting a home loan pre-approval can help you to set your budget. You can also consider getting pre-approved if you want to refinance a home loan.

Lenders can also partner up with credit rating agencies and send out pre-approved offers to borrowers. Such approvals are made on the basis of a soft credit check to look at some of the key characteristics of a borrower’s profile. This has no impact on your credit score. But if you decide to apply, the lender conducts a hard credit inquiry before extending the loan.

Receiving a home loan pre-approval before you even begin your property search can give you much-needed peace of mind and help you decide your budget. Moreover, unless you intend to pay in all cash, most sellers are likely to reject your offer unless you can show them a pre-approval.

There are two types of pre-approval home loans you can consider:

A full assessment

A full assessment pre-approval is very extensive. The lender carries out a complete assessment of your finances, reviews the relevant documents, and pulls out your credit history. You may even need to conduct a valuation of the property and speak to the lending manager in person or via phone to answer questions.

A system-generated pre-approval

A system-generated home loan pre-approval is a shorter and quicker process. All you need to do is apply online. The algorithm that’s tweaked to a lender’s eligibility criteria takes care of the rest and responds to you within a few hours or even a few minutes. It is similar to online loan approval and a better option if you are in a rush.

How much time it takes to get a pre-approved home loan depends on the mortgage lender you approach and how well-qualified you are for the loan. You could get pre-approved within one business day, or it can take a few weeks to come through, especially if the lender has to verify a lot of paperwork.

To reduce the home loan pre-approval time, make sure to maintain a good credit history and keep all your documents in order.

Usually, loan pre-approvals are valid for anywhere between 30 to 90 days. The exact period of validity depends on your lender.

Once it expires, you need to get pre-approved again. Any changes to your financial situation in the meantime can impact the decision of the lender. Also, remember when you apply to a lender to be pre-approved for a loan, a hard iniquity is conducted to pull out your details. This can reduce your credit score by a few points.

However, the dip is minimal, and it is unlikely that the lender will change their decision when you actually apply for a pre-approved offer prior to its expiry.

Ideally, you should apply for pre-approval as soon as you decide to buy a house.

Waiting to begin the process till you find your dream house may be too late, and you may not hear from the lender in time to make an offer. Moreover, if you opt for a full-assessment pre-approval, it may be a while before you hear from the lender.

So consider pre-approval as part of the list of things you need to get in order before you start looking.

While seeking a mortgage pre-approval is helpful before you put in your offer, multiple pre-approvals are not the right way to go.

Mortgage pre-approval impacts your credit score. When you ask the lender to start the pre-approval process, they review your credit history and pull out your credit report. This is considered a hard inquiry. Making too many applications within a short time can result in multiple hard inquiries and ultimately bring down your credit score. This can make it difficult for you to get loans in the future.

Moreover, multiple applications can also signal to the lender that you are facing financial difficulties, making them question your creditworthiness and reducing your chances of getting approved.

Remember that every single loan application will impact your credit score unless you are applying for no credit check loans. Therefore, it is ideal to compare your options and then decide which lender you will approach for a pre-approval.

Yes -- getting pre-approved for a home loan is not a guarantee of securing the loan. It is only a preliminary check that lets you know your application meets the standard eligibility criteria of the lender, and you stand a chance of getting a loan.

Any changes in your credit history or financial status can result in the lender rejecting your mortgage. How long a declined loan stays on your credit report can depend on a number of factors, including the reason for rejection.

Here’s a snapshot of common reasons for a mortgage getting denied post pre-approval:

Credit score going down

Loan defaults or borrowing more debt after getting pre-approved, your credit score may dip. If your current score is not in line with the minimum score expected by the lender, your application may be denied.

Opening more lines of credit

Borrowing additional credit after pre-approval signals the lender that you have incurred excessive debt. This makes you a risky borrower.

Your property may not fulfil contingencies

The lender may carry out a home inspection and appraisal before sanctioning a pre-approved mortgage. If they find out that the seller cannot provide clear title to the property and there may be existing interests in the property, or another lender may have a lien, your pre-approval may be cancelled.

If your mortgage is denied after pre-approval, don’t start a new mortgage application process immediately. Multiple applications in a short time are bad news for your credit report and can impact your chances of getting approved.

Get in touch with your previous lender and try to find out why your pre-approval for a home loan was denied. If the reason is easily fixable, such as a bad credit score, work towards remedying the situation before you apply again.

However, if your mortgage application was rejected after pre-approval because of a change in your income, you may need to speak to a new lender before initiating a formal application process and evaluate your chances of getting a loan.

Here are five home loan pre-approval requirements you must fulfil when you approach a lender:

1 - Proof of assets

Lenders need you to provide a list of assets when you apply for a home loan pre-approval as they want to ensure you have sufficient means to make the downpayment and closing costs. If some of your assets have been gifted to you by a family member, you may also need to provide a letter documenting that these gifts are not in the nature of a loan.

2 - Proof of income

Most lenders ask for salary slips from the past two years, along with proof of any additional income and tax returns. This is to ensure that you have a steady source of money to pay off the mortgage.

3 - Good credit score

Depending on the lender, the minimum credit score for home loans can be anywhere between 500 to 700. A score within this range improves your chances of getting pre-approved quickly as lenders are convinced about your creditworthiness.

Applying with a low score doesn’t necessarily mean rejection. Your mortgage may be pre-approved, but you may need to make a larger down payment. In case of low credit scores, you can also explore bad credit home loans.

4 -Employment details

Lenders are more likely to pre-approve home loan applications of borrowers with a steady employment record as it signals stable income. Some lenders may even call the employer to verify the information provided.

If you are self-employed, you may need to provide tax returns from the past two years and additional documents that help you establish the stability of your income.

5 - Other documents

Lenders may also request other documents on a case-to-case basis to review a pre-approval application.

The quicker you comply with the requests, the better your chances of getting approved.

House hunting can be an incredibly stressful process. Pushing home loan apply online at the bottom of your to-do list can prove a costly mistake.

Now that you know how valuable a pre-approval is, don’t put in your mortgage application at the last minute and wait for the loan to be approved. As soon as you know you need a home loan to fund your purchase, start the pre-approval process.

Before you apply, make sure to check credit score to understand what kind of loan offers you are eligible for. ClearScore gives you access to free credit reports in just few clicks. Take a look.