It’s the biggest hack to homeownership, and probably the most misunderstood: a home loan preapproval. How do you know when you’re financially set to get preapproved? Here’s what lenders look for and what you need to do if you’re not quite there.

Unlike a mortgage pre-qualification, a preapproval is more than just a conversation with a lender. You’ll have to submit quite a bit of paperwork, including employment verification and checking, savings and investment records. The lender will pull a credit report on you.

The elements lenders look for in mortgage preapproval are the same industrywide:

Usually, there’s no charge to apply for a mortgage and gain a preapproval, though some lenders will seek reimbursement for the fee to pull your credit.
Get Preapproved for Your Mortgage Job and credit history

The two-year employment history rule has a little leeway; for example, if you are a recent graduate and have proof of future income from your employer. However, transitioning from a W-2 pay stub job to self-employment — without a two-year track record for your new business — is a “definite hard stop in today’s mortgage world,” Don Bleuenstein, national sales director of retail home lending with Flagstar Bank in Troy, Michigan, tells NerdWallet.

He says a credit score of at least 620 is a “fairly hard rule.” But your credit score, which you can often obtain free of charge from a credit card company or bank, may not tell the whole story. While it’s hard to crack the code of all the different credit score models, Bleuenstein says that, in his experience, credit scores used for mortgages are tougher than the consumer credit FICO scores that have become readily available.

This may be because for mortgage credit scores, it is your middle score that counts among the three providers, TransUnion, Equifax and Experian.

Also, you probably can’t count on your spouse’s or partner’s pristine credit score if the home will be in both your names. With two or more borrowers, the worst scoring party’s middle score is used, Bleuenstein says.

Assets and down payment

“The ability to budget and save shows financial discipline,” says Staci Titsworth, regional manager for PNC Mortgage in Pittsburgh. “Sometimes clients receive gift money, and that’s fine, or they get a big bonus, and that’s great. We just have to show the underwriter the source of where those monies came from and that the monies were not borrowed.”

However, lenders know we don’t live in an ideal world, she says.

“Let’s face it, nobody’s perfect,” Titsworth says. “Life is not perfect. There are bumps in the road. People lose jobs; people experience job changes. People have unexpected expenses that they have to dip into their savings for. With that, it’s all about the documentation. It’s all about presenting their information to the underwriter that explains the financial ability to repay the mortgage.”

Debt and income

As for debt and income, Bleuenstein says lenders are looking for a debt-to-income ratio of 43% or less. That amount, called a back-end DTI, includes your mortgage payment.

“So if you make $10,000 a month gross [before taxes], $4,300 is what all of your debt on your credit report needs to be under,” he says, including your future house payment, monthly property taxes and homeowners’ insurance as well as your credit card, student loan and/or car payments.

But the numbers have a little wiggle room. Say your DTI is a bit high, perhaps 46%, but you’ve got a good credit score — for example, somewhere around 700 — and you have a 5% down payment in the bank; in that case you probably would get mortgage preapproval, Bleuenstein says.

When to start the mortgage preapproval process

Seeking a preapproval long before you start house hunting will accomplish one important goal: alerting you to any qualifying issues you may not be aware of.

“What’s prudent is: Get preapproved now if you think you’re going to buy in the next year,” so you have time to fix any glitches, Titsworth says. Although preapprovals are usually valid for only 60 to 90 days, a lender will extend them if you update information about your current financial condition.

And once you get mortgage preapproval, you can confidently shop for a home.
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