It is always wise to secure pre-approval for a home loan before you begin the home shopping process when purchasing a new home. Pre-approval also offers you a letter from a lender detailing the amount the lender is ready to lend to you. This can enable you to browse the houses in the market of your choice with a lot of ease and confidence. In this guide, you can find out what pre-approval is, why it matters, what documents and other details you will need to share to be pre-approved, and the sequence of actions.
What Is Pre-Approval?
If a lender pre-approves you for a mortgage, the lender looks at your income, debts, assets, and credit score to find out how much you can borrow. Pre-approval is not the same as pre-qualification where you are deemed eligible for a loan based on a few details you supply to the lender. Pre-approval consists of credit check, evaluation of risks, and approval for a mortgage loan up to a specific dollar amount subject to which the mortgage can be issued. You will get a pre-approval letter that you can use to convince sellers that you are financially capable of buying a home.
Why Get Pre-Approved?
Getting pre-approved has several key benefits:
Shows sellers you’re serious. Other benefits of pre-approval include informing home sellers that you are a serious buyer who has been approved by a lender. This can help to make your offer more appealing in a competitive market scenario.
Saves time. To avoid having to seek approval at the wrong time during the buying of homes, it is essential to go through the pre-approval process beforehand.
Locks in rates. Depending on the type of mortgage, you will receive pre-approval that allows you to lock in an interest rate that will help you if rates go up later.
Determines price range. It is wise to know the amount pre-approved to help in setting a baseline of the houses within the financial capacity, instead of eyeing houses beyond one’s means.
Strengthens bargaining power. Once you have the funds in place, you may be in a stronger position to negotiate on your offer price and closing date.
What You Will Require for Pre-Approval
Every lender has different pre-approval requirements, but be prepared to provide:Every lender has different pre-approval requirements, but be prepared to provide:
Proof of identity - This includes items such as driver’s license, passport or social security card.
Tax returns - Be prepared to submit W-2s or 1099s for the past two years. The applicants for self employment should have several years of returns.
Pay stubs - Latest pay slips reveal details of the employer, income and the amount earned so far in the current financial year.
Bank statements - These can prove the regular deposits of your income and can also corroborate your debts and assets.
Debt information - A borrower will be required to reveal debts such as credit card debts, education loans, car loans, and home loans.
Downpayment funds - It is advisable that the lenders have access to your checking or savings account balance as this will show your ability to make down payment.
Retirement funds - Reveal current balances of 401k or IRA accounts that you intend to use to pay for the down payment.
Credit history - Lenders will carefully look at your credit report from the three credit reporting bureaus.
The Pre-Approval Process
Here are the typical steps to getting pre-approved:Here are the typical steps to getting pre-approved:
Find a lender - Go to consumer review websites in order to determine which mortgage lenders have the best rates and pre-approval features.
Gather paperwork - Gather all the necessary documents electronically or in hard copy to support your financial status as stipulated above.
Complete application - Your lender will make you to complete a loan application where you will provide information about employment, income, assets and liabilities.
Authorize credit check - Accept you might be required to give consent for the lender to pull your credit report to look at your credit history.
Send follow-up information - Be cooperative in getting the lender any extra information they require in order to apply and hasten the approval process.
Get pre-approved! Upon approval, the lender provides a pre-approval letter that outlines the specific loan amount, interest rate, and terms you can secure. The rates may be locked in anywhere from 30 to 90 days.
If you face a rejection, try to appeal or reapply. If your application is rejected, you should know the reason why and then you should be able to talk about how you can get a better chances the next time, change some documents or try other lenders.
Pre-Approval vs. Prequalification
Pre-approval and prequalification are often used interchangeably, but they mean very different things:Pre-approval and prequalification are often used interchangeably, but they mean very different things:
Prequalification Pre-Approval I would like to point out that all the following information was obtained based solely on the information provided by you. Allows for the documentation and verification of all financial information Gives a broader concept or an average picture of affordability It requires proper evaluation and rating by the underwriters Not a guarantee of approval or interest rate Agrees to advance a specified loan amount at a particular rate but under certain circumstances
It has been noted that housing market today is highly competitive thus it is wise to be pre-approved with a lender before actually start the search. Decide how much in loans and/or down payments you are qualified for, collect the necessary financial documents, select a reliable lender, complete their application form, and obtain your pre-approval letter. With solid pre-approval, you’ll have confidence searching for your dream home knowing exactly what places you can afford.
