Mr. Cooper Mortgage Review 2024: Online Mortgage Options With Opportunities To Save (2024)

Vault’s Viewpoint

• Mortgage pre-approval is a key step in taking out a home loan.
• The mortgage pre-approval process typically involves a credit check.
• Obtaining pre-approval does not guarantee you’ll receive final approval for a mortgage.

What Is Mortgage Pre-Approval?

A mortgage pre-approval indicates that a lender has tentatively agreed to let you borrow a certain amount of money for a home purchase after typically conducting a credit check. A pre-approval letter doesn’t mean that you’ll actually get the loan, though. Instead, it tells a seller that the lender will likely approve your loan application.

A seller often wants to know that you’ve been pre-approved before signing a sale contract. A pre-approval letter expires after, say, 60 to 90 days.

Mortgage pre-approval differs from mortgage prequalification, which comes before pre-approval in the home-buying process. When you prequalify for a mortgage, you get a rough idea of how much money you may be able to borrow based on your finances and credit history.

Prequalification can help determine how much you can afford to pay for a home and which lender to use, for instance. It’s worth noting that you aren’t required to use the same lender for your mortgage as the one you used for pre-approval.

How to Get a Mortgage Pre-Approval

When you seek mortgage pre-approval, a lender considers your credit history, debts, income and assets.

But lenders don’t necessarily approach pre-approval in the same way. Some lenders base pre-approval only on the information that you supply, according to the Consumer Financial Protection Bureau, while others do a deeper dive into your personal and financial data.

Pre-Approval vs. Verified Pre-Approval

Some lenders might offer two types of pre-approval letter: a regular pre-approval and a verified pre-approval.

For a regular pre-approval, you normally don’t need to provide documents to back up the information you provide about credit history, debts, income and assets when you submit your application. You often receive a pre-approval letter within minutes of completing the application.

A verified pre-approval letter goes beyond a regular pre-approval letter. To get a verified pre-approval, you’ll need to submit various documents that support the financial information you gave. The lender then goes through an underwriting process like the one it performs when you apply for a mortgage. Finally, the lender issues a letter stating that your information has been verified, including your credit history, debts, income and assets, and that you’ve been cleared to borrow a certain amount of money.

Both a regular pre-approval and a verified pre-approval involve a “hard inquiry.” A hard inquiry happens when a creditor asks to look at your credit file after you’ve submitted a credit application. This type of inquiry shows up on your credit report and might cause a temporary decrease in your credit score.

How to Prepare for Mortgage Pre-Approval

One of the most important things to do before seeking mortgage pre-approval is to check your credit.

First, look at your credit report to see if any issues show up that need to be corrected and that might pull down your credit score. For example, perhaps your credit report mistakenly lists a late credit card payment.

Next, go over your credit card balances. You should aim for a debt-to-income ratio of 36% or less. This ratio takes into account your monthly debt payments, particularly credit card bills, and your monthly gross income. If your debt-to-income ratio is high, you might want to pay down some balances to improve your odds of borrowing the amount you’re seeking and of qualifying for a lower interest rate.

If your credit score or debt-to-income ratio aren’t ideal, consider putting off applying for mortgage pre-approval until you’ve gotten your finances into better shape.

What Information Do You Need for a Mortgage Pre-Approval?

Depending on the lender, here is some of the information you’ll likely need when filling out an application for mortgage pre-approval:

• Government-issued ID, such as a driver’s license or passport
• Social Security number
• Pay stubs
• Two most recent W-2 forms
• Two most recent tax returns
• Bank statements
• Investment account statements
• Business documents (if you’re self-employed)
• List of monthly debts, including rent or mortgage, credit cards, auto loans and personal loans

What Credit Score Do You Need for Mortgage Approval?

When you’re applying for a home mortgage, you generally need a credit score of at least 620 to be approved. However, government-backed mortgages might come with lower credit score requirements. For example, the minimum credit score for an FHA loan is 580. Some lenders’ minimum scores might be as low as 500.

Credit scores typically range from 300 to 850. The minimum 620 credit score for most mortgages fall into the “fair” category on FICO’s scoring scale. Most lenders rely on FICO scores to make lending decisions.

Because pre-approval involves pulling your credit report, you might see a small, temporary decline in your credit score.

The chart below shows the formula that FICO uses to calculate credit scores.

What Should I Do if My Pre-Approval Application Is Rejected?

If a lender denies your pre-approval application, don’t give up. Instead, find out why the lender rejected your application.

Under the federal Equal Credit Opportunity Act, you’re entitled to be given a reason for the denial. In addition, the lender must tell you the credit score that was used to make its decision and let you know that you can obtain a free copy of your credit report. So, if your credit score was the big factor in the rejection of your application, work toward boosting it.

Once you’ve pulled your credit report, review it carefully. Your credit report might indicate, for example, that you’re carrying too much debt and should reduce it to bump up your odds of mortgage pre-approval.

Once you’ve fixed any issues standing in the way of pre-approval, you can try again to qualify.