Home shopping often starts in a lenders office with a mortgage application and not at an open house. The majority of sellers anticipate that their buyers will secure pre-approval for financing, and they are typically open to negotiating with those who can demonstrate loan qualification.
Getting pre-approved for a mortgage is a crucial step in the homebuying process. It lets sellers know you’re serious about the purchase and provides you with an estimate of your budget. But does pre-approval include the down payment?.
The short answer is no. Pre-approval is based on your income, credit score, and debt-to-income ratio. It indicates the highest amount you are eligible to borrow; however, the down payment is not included.
Here’s a breakdown of what pre-approval does and doesn’t include:
What pre-approval includes:
- The maximum loan amount you qualify for
- The interest rate you’re likely to receive
- The loan terms (e.g., fixed or adjustable rate, loan length)
What pre-approval doesn’t include:
- The down payment amount
- Closing costs
- Other expenses associated with buying a home
So. how much down payment do you need?
The down payment amount depends on the type of loan you’re getting. For example, conventional loans typically require a 20% down payment, while FHA loans allow for a down payment as low as 3.5%.
Here’s a table summarizing the down payment requirements for different loan types:
| Loan Type | Minimum Down Payment |
|---|---|
| Conventional | 20% |
| FHA | 3.5% |
| VA | 0% |
| USDA | 0% |
What if you can’t afford a 20% down payment?
If you can’t afford a 20% down payment, you may be able to get a conventional loan with private mortgage insurance (PMI). PMI is an additional monthly premium that protects the lender if you default on your loan. You can typically cancel PMI once you have 20% equity in your home.
Here are some other options if you can’t afford a 20% down payment:
- Get a gift from a family member or friend to help with the down payment.
- Use a down payment assistance program.
- Consider a different type of loan, such as an FHA or VA loan.
The bottom line is that pre-approval doesn’t include the down payment, but it’s an important first step in the homebuying process. Once you get pre-approved, you can start looking for homes and figuring out how much you can afford to put down.
Here are some additional things to keep in mind about pre-approval:
- Pre-approval is not a guarantee that you’ll be approved for a loan. The lender will still need to verify your information and approve your loan application.
- Pre-approval is typically valid for 30-90 days.
- You can get pre-approved by multiple lenders to compare interest rates and terms.
Getting pre-approved for a mortgage is a big step, but it’s worth it. It will put you in a stronger position to buy your dream home.
FAQs
Q: Do I need to get pre-approved before I start looking for homes?
A: It’s a good idea to get pre-approved before you start looking for homes. This will give you a better idea of what you can afford and will make you a more attractive buyer to sellers.
Q: How long does pre-approval take?
A: The pre-approval process typically takes 1-2 weeks.
Q: What documents do I need to get pre-approved?
A: You will need to provide the lender with your income, employment, and asset information. This may include your pay stubs, tax returns, bank statements, and investment statements.
Q: What happens if I get pre-approved but then my financial situation changes?
A: If your financial situation changes, you will need to contact the lender and let them know. They may need to re-evaluate your pre-approval.
Q: What are the benefits of getting pre-approved?
A: There are many benefits to getting pre-approved for a mortgage. It can help you:
- Get a better interest rate
- Be a more attractive buyer to sellers
- Save time and money on the homebuying process
Getting pre-approved for a mortgage is a big step, but it’s worth it. It will put you in a stronger position to buy your dream home.
Requirements for Pre-Approval
In order to receive mortgage pre-approval, a buyer must fill out an application and submit supporting documentation, evidence of assets, income, and good credit, as well as employment verification.
Depending on the type of loan, pre-approval is based on the buyer’s debt-to-income ratio (DTI), FICO credit score, and other variables.
Except for jumbo loans, all loans conform to Fannie Mae and Freddie Mac guidelines. Some loans are designed for low- to moderate-income homebuyers or first-time buyers. Others such as Veterans Affairs (VA) loans, which require no money down, are for U. S. veterans and service members.
Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
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Pre-Approval vs. Approval
When a lender receives a completed mortgage application, they have three business days to provide a loan estimate. It describes the maximum and pre-approved loan amounts, the terms and kind of the mortgage, the interest rate, the estimated interest and payments, the estimated closing costs, the estimated amount of property taxes, and the information on homeowner’s insurance.
Eventually, the loan file will be transferred to a loan underwriter, who will confirm that the borrower satisfies the requirements of the particular loan program in order to grant full approval. The buyer and lender can then proceed with the loan closing if the buyer’s financial situation hasn’t changed since pre-approval. When the buyer completes the home’s appraisal and applies the loan to the property, the loan is approved in full.