Gaining pre-approval for a mortgage is an essential element in the purchasing of a home. It not only provides you with a concrete notion of your financial constraints but also assures the sellers of the house that you are the kind of person who can be trusted to actually deliver the money.
If you have pre-approval, it is almost as good as having cold, hard cash in your hand. Even if you are forced to wait because the sellers have more than one offer, pre-approval decidedly places you ahead of the game.
A mortgage pre-approval is an extensive look into your financial life conducted by a lender to figure out how much money they can reasonably lend you and what interest rate they can set for that loan. There are a lot of steps to the pre-approval process, but it can be a critical part of buying a home.
The initial move in the pre-approval of your mortgage is a careful investigation of your credit report. The credit score is the figure the lender uses to decide whether you are worthy of extending a loan to you, and so you want to make sure you come across as appealing as possible. And the way to do that is to ensure your credit scene is accurately represented on the report.
“Paying down existing debts, or addressing those munitions of poor repayment, might help boost your report in the short run,” wrote The New York Times in a 2018 article on the subject. “Avoiding new lines of credit, which also means going easy on potential hard credit inquiries by other would-be lenders, is another way to boost your appeal.”
After that, collect all the essential financial records. Pay stubs, W-2 forms, tax returns from the previous two years—these are what lenders typically want to see about my income. Moreover, it seems I have to offer up the privacy of my bank account, furnish them with a complete listing of my assets, and inform them of my debts. And they don’t just want to see all of these figures; they’d like some sort of proof.
Picking the proper lender is a vital part of the process. Look into and evaluate mortgage lenders to locate one offering not only competitive rates but also the terms most suitable for your personal financial situation. You can initiate your investigation by talking to your local bank or credit union, but don’t stop there. Be sure to look into a variety of other possibilities, as well, including online lenders and mortgage brokers, before you make your final decision.
After you’ve picked a lender, the next step is to fill out a form. The form you need is the pre-approval application. Like any application, it asks you to supply the information your lender needs to dispense the funds you’re requesting. This usually means supplying the same personal and financial details outlined in the pro forma I just described. Of course, you supply your real, truthful information here. Be warned: Providing false information is mortgage fraud, and it is a felony!
Once you turn in your application, the loan company will go over your financial details with a fine-tooth comb. They have a vested interest in making sure you’re qualified for the loan. They might ask you for all the documents again that you already turned in to your loan officer. And like an also-ran detective in a serial-killer thriller, they’ll go over it all with you. The company will also probably assign a human underwriter to your file, as opposed to an automated underwriting system. Human underwriters are those unsung heroes of the mortgage-lending process who make split-second decisions with billions of other people’s money.
Assuming your application is accepted, the lender will proceed to grant a pre-approval letter. This letter indicates the highest loan sum you are eligible for and the anticipated interest rate. The purpose of a pre-approval letter is to show sellers and real estate agents that you are a committed buyer with the financial ability to close the transaction.
It is vital to understand that pre-approval is different from the final loan approval. The latter hinges on the property’s more thorough examination and any potential financial changes you undergo, whereas pre-approval is primarily a financial stamp of confidence. Still, it is the next-best thing to a final approval decision, making it an excellent start for buying a home.
It is absolutely necessary that you keep your steady financial status intact once you’ve been given pre-approval. Don’t muck it up by doing something that threatens your credit rating or, worse yet, your debt-to-income ratio—pronto. Now is not the time to be signing up for big monthly payments on a new car, for instance, or to show your appreciation for the society that’s just advanced you to pre-approved status by maxing out those shiny new credit cards.
In summary, it is very important to be pre-approved for a loan before you go house hunting. This is for your own peace of mind, really. Getting pre-approved means a lender has looked through your credit report and has “pre-approved” you for a loan of a certain amount of money. The lender has a clear sense of your financial background and has also run some calculations to give himself a sense of the amount of money you can afford to borrow.
This whole pre-approval process can be long and may involve lots of paperwork, but in the end, it’s worth it. It’s worth it because having a pre-approval letter tells a seller you are a serious buyer who really can pay for the house you are trying to purchase.
