If you are thinking about buying a home using an FHA loan, one of the first steps in the process is to get a pre-approval, but what is pre-approval? Why do you need pre-approval for an FHA loan, and how do you get it? That’s all that we look at in this post.
So let’s get started.
What is Pre-Approval?
Wondering what exactly pre-approval is? It is a statement from your potential lender stating that you, as a borrower, would be approved for a certain amount of loan in accordance with the lender’s guidelines.
The process has a “pre” because you request this approval before you have found a property.
How does an FHA Loan Pre-Approval Work?
Here is how an FHA loan pre-approval works.
It starts before you have found a home; therefore, it has a “pre” attached to it. However, it is the initial step that paves your path for the house-hunting job.
When you apply for pre-approval, the lender will closely study your financial position and will ask you directly or indirectly these four questions about your finances.
What’s Your Credit Score?
The FHA lending program requires a FICO credit score of at least 500. This is only the bare minimum set by the program, however. You typically need a credit score of 580 for a lower down payment; however, even if you have a credit score between 500 and 579, you can still secure an FHA loan. Often you will be required to make a downpayment of 10% if you don’t meet the higher standards set by individual lenders. Many lenders will even set significantly higher minimums to accept applicants for FHA loans, with floors on FICO scores set as high as 620. Check out our blog on building your credit score for tips on how to improve your score.
How Much Income Do You Have?
Another very critical component that your potential lender will examine for the FHA pre-approval is your income. Understanding your earning patterns will allow the lender to determine how much you earn each month, determining your loan repayment likelihood. Lenders want to see a reliable source of income with a track record of at least a year or two; usually, this means employment with clear paystubs. Other sources of income might also be looked at, ranging from alimony to dividends and any other documented sources.
What Debts Do You Have?
Your potential lender will also examine the amount of debt you currently have to estimate the debt-to-income ratio. To secure an FHA loan, your debt-to-income ratio should range below 43%, and of course, the lower, the better. Many lenders prefer to see a debt-to-income ratio closer to 20% or 25%, especially for first-time home buyers.
What Are Your Assets?
For the FHA pre-approval process, your potential lender will also review your assets, including but not limited to your financial assets. Any other properties you own or long-term investments you’ve made will be considered in this category. You’ll want to make sure that you have documentation for retirement savings available, for example.
Why Do You Need Pre-Approval for an FHA Loan?
Now that you already know what pre-approval is and how it works, let’s delve into some of the reasons why you need pre-approval for an FHA loan.
1. You Emerge as a Serious Buyer
When you have a pre-approval statement, you emerge as a serious buyer to your potential sellers. With a pre-approval statement, real estate agents and potential sellers will consider you as a serious buyer who is genuinely interested in buying a property which is why you chose to have the backing of a lender.
Having a pre-approval statement also means that your lender has thoroughly studied your financial background and has already determined how much you can afford to pay for a home.
Moreover, given the housing market typically has a lot more buyers than sellers, having the credibility of a lender will allow you to quickly beat other potential buyers and get the home of your dreams.
2. You End Up Saving Time for Yourself
Getting a pre-approval statement can help you save a lot of time because it helps you determine how much you can afford to pay for the property. Once you know how much you can pay for the home, you can do your research based on your price level, allowing you to focus more on the home’s features instead of worrying about the home’s price.
3. You Are In a Better Bargaining Position
When you have a pre-approval letter, you can likely negotiate better with your potential sellers because you already have the backing of the lender, which shows that you are a serious buyer.
4. Pre-Approval Speeds Up the Closing Process
With a pre-approval letter, you can speed up the property purchase and closing process, and the lender has already gathered and processed your financial information.
How Do You Get Pre-Approval?
To get pre-approval for an FHA loan from your lender, you will have to provide some information to your potential lender. This includes (but is not limited to) information mentioned above about your finances, including your credit score, debt, and income. Following the preliminary evaluation of the information you provided, your lender will determine whether or not you are a pre-approved borrower and provide you with a written statement known as the pre-approval letter.
The pre-approval letter is typically valid for somewhere between 60 to 90 days, during which time you can find an excellent home to purchase with your FHA loan!
With a pre-approval letter, you emerge as a serious buyer, which gives you more power to negotiate and bargain with your potential sellers. Getting a pre-approval is relatively simple and offers you several benefits, so why not apply for pre-approval today with Integrity Mortgage, LLC (NMLS #1692497)?