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Mortgage Pre-Approval

3-MINUTE READ November 27, 2024

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Mortgage Pre-Approval: A Step-by-Step Guide

Are you ready to start your home-buying journey but feeling unsure about the mortgage pre-approval process? At Mercato Mortgage, we specialize in simplifying your home financing experience. Here’s a guide to help you understand everything you need to know about mortgage pre-approvals, based on years of experience assisting thousands of clients.

What is a Mortgage?

The Basics

A mortgage is a loan secured by real estate, repaid in installments. It consists of:

Approval Process
- Borrowers qualify based on their credit, income, employment, and assets.
- The property must also meet lender requirements.
Payments
- Payments are divided into principal (the borrowed amount) and interest (cost of borrowing). Over time, more of your payment goes toward the principal.
Programs
- Options range from conventional loans to government-backed FHA or VA loans, each tailored to different needs.
Closing Costs
- These include lender fees, points, appraisals, and taxes. Our team ensures transparency so there are no surprises.
Rates
- Rates fluctuate based on market conditions. Understanding the difference between the Note Rate and APR can save you money.

Pre-Approval vs. Pre-Qualification

Confused about the difference? Here's what you need to know:

Pre-Qualification
A quick snapshot of your financial picture, usually without reviewing documents. It's a helpful starting point but not a solid commitment.
Pre-Approval
A detailed process where lenders review your financial documents, giving you a firm commitment on how much you can borrow.

With a pre-approval letter, you can:

Understand your buying power.
Show sellers you’re a serious buyer.
Enjoy smoother negotiations during your home search.

How to Get Pre-Approved

Here’s what you’ll need to provide:

For W-2 Employees

Last 2 years’ W-2s and tax returns.
2 most recent pay stubs.
Bank and investment account statements.

For Self-Employed Borrowers

Last 2 years of business and personal tax returns.
Profit & Loss statement.

Additional Documents

Letters explaining employment gaps or credit issues.
Child support or alimony documentation (if applicable).
Lease agreements or mortgage statements for other properties.

How Much Can You Afford?

Lenders calculate affordability using the Debt-to-Income (DTI) ratio, which should ideally stay below 43% of your gross income.

Example:

Monthly gross income: $6,000
Max DTI: 40% = $2,400 for housing payments.
Loan estimate: $2,400 ÷ $7 per $1,000 = $342,857

This calculation is a guideline—our team helps ensure your mortgage fits your lifestyle and budget.

Why Work with Mercato Mortgage?

We prioritize personalized service, guiding you through every step of the process. Unlike generic lead generation sites, we never sell your information to third parties. When you work with us, you get: