When it comes to buying a home, financing the purchase is far more common than buying with cash, as only 32% of homebuyers go the latter route. As part of the purchase process, most buyers need a mortgage preapproval. Along with showing homebuyers the maximum amount they can potentially borrow, it can help them stand out from bidders who haven’t completed this step, possibly increasing the odds that the seller will select their offer.
However, for a mortgage preapproval to help, it needs to be strong and accurate. As a result, it’s wise to take specific steps to put yourself in the best possible position. Here are four tips that can help you successfully navigate the preapproval process.
Work on Boosting Your Credit Score
Overall, mortgages don’t often require particularly high credit scores. For example, a conventional mortgage may set the minimum credit score at 620, while an FHA home loan may only need a 580.
However, as with any loan, the higher your credit score, the better your terms and the more likely you are to get approved by a lender. As a result, spending time to boost your credit score before you attempt to secure a mortgage preapproval works in your favor.
Decrease Your Debt-to-Income Ratio
Having a lower debt-to-income ratio also works in a borrower’s favor. Lenders usually have maximum debt-to-income ratios that they consider cutoffs for a home loan. By reducing your debt payments, you’ll have more room in your budget to support a new mortgage. In turn, your approval chances are higher, and you may qualify for a larger home loan.
Get Documents Together Ahead of Time
The mortgage preapproval process requires a significant amount of documentation. Usually, you need to provide specific paperwork that clearly demonstrates your income, that you’re employed, the existence of any relevant assets, and that proves your identity. Additionally, you’ll need to list specific details about your debt, and having particular documents makes that easier.
Generally, you’ll want to gather the required paperwork in advance. Here are the documents you’ll usually need:
- Pay Stubs, W-2s, 1099s, and Tax Returns
- Bank and Other Financial Account Statements
- Government-Issued Identification
- Creditor Account Statements
Depending on your financial situation, a lender may require other types of supporting documents. However, having those above gathered usually gets you started on the right foot.
Ask for an Adjustment If Needed
In some cases, asking a lender to adjust the amount shown on a preapproval letter works in a buyer’s favor. For example, if you’re preapproved for $250,000 but find a home you want that’s selling for $210,000, asking the lender to adjust the letter to only show $210,000 (or a figure just slightly above that if you’re in a competitive bidding situation and are willing to potentially pay more) isn’t a bad idea.
Usually, preapproval letters are submitted to the seller along with an offer. By having the amount on the letter come in closer to what you’re prepared to spend instead of the full preapproved amount, the seller is less inclined to try asking for more than you’re comfortable offering.
