Find out why being prepared to buy a home means being Pre-Approved!
If buying a home makes sense for you, then it is essential that you start the process correctly! And that means getting a Pre-Approval Letter! I understand you are excited about buying a home and want to look at homes ASAP…
Looking at homes before talking to a lender is putting the cart ahead of the horse!
It is talked about extensively in home buying guides that you should start the house buying process by getting pre-approved! Yet for some reason, some people thinks this does NOT apply to them.
Getting pre-approved shows home sellers that you are serious about buying. Plus it will speed up the process once your offer is accepted.
What exactly is a Pre-Approval Letter? It is a letter that says you have been pre-approved by a bank or mortgage lender for a certain amount. The bank or lender has checked your credit history and decided that you are a good candidate for a mortgage. ALL experienced buyers agents will need a copy of your Pre-Approval before they will help you.
Which lender you select is up to you and not something to rush! I strongly suggest speaking with friends, family, and co-workers to get their recommendations.
You will need to fill out the lender’s loan application. And you must give them information about your credit, debt, work history and where you havve lived.
There are 4 Cs that help determine how much the bank will lend you:
- Capacity: Your ability to make your payments
- Capital: The money, savings, and investments you have that can be sold quickly for cash
- Collateral: The property that you want to buy
- Credit: Your credit report and bill paying history
Most pre-approvals are only good for a certain amount of time. A pre-approval says a lender is ready and willing to lend you money BUT it is NOT a guarantee! The lender is going to verify your information and documents to decide how much it would be willing to lend to you.
The pre-approval process does not include a full-fledged underwriting review by the lender. This means it’s not an absolute commitment to issue you a home loan. There may even be conditions listed on the pre-approval that are contingent to getting the loan.
Remember, a pre-approval is proof that a lender is willing to give you a mortgage loan BUT it is not an official commitment.
The number 1 reason to get pre-approved is so you can make an offer quickly. Once you make an offer, you won’t have to scramble for financing since you’re pre-approved.
Like I said earlier, a pre-approval is not a guarantee that the bank will give you a mortgage. BUT it will speed up the underwriting and loan approval process. And it can save you time and heartache!
Sometimes, home buyers put off talking with a lender because they are scared of what they might hear. It’s like when people don’t go to the dentist because they are afraid to find out how many cavities they have. You cannot ignore a cavity and you cannot ignore getting a Pre-Approval Letter!
I must warn you that your bank or lender is going to want information that you may feel is personal or private. If someone asked you to lend them a bunch of money, you would want to do a little investigating.
Another reason to get pre-approved is so you do not assume you will qualify for more than you can. Just because someone else qualified for a certain amount does NOT mean you will. Or you may qualify for more!
Knowing your limit will give you confidence when making offers. Remember, you do not have to spend as much as the bank approves you for. It is better to have a monthly payment that is easy to make and does not leave you “house poor”.
The final reason to get that super important Pre-Approval Letter is so you will be able to submit it with your offer! The best way to show you are serious about buying a home is with a pre-approval letter. Remember, serious buyers make serious offers!
Freddie Mac has this to say about getting Pre-Approved:
It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.
I think you can see why all these reasons make getting Pre-Approved is the smart thing to do when buying a home!
Some people think that the pre-approval process takes a long time or is complicated. It isn’t IF you are prepared and know what to expect!
You start by going to several lenders and filling out a mortgage application. They are going to need and you MUST give them documents related to your financial history. The lender is going to look into your finances to determine how much money they are willing to loan you.
They are also going to verify your income or employment. After all, they have to know you can make the payments.
At the end of the pre-approval process, if the bank likes what it sees, you’ll receive what’s used to be called a good faith estimate (GFE). Now it is called a Loan Estimate. It is a 3 page document and supposed to be written in easy to understand language.
The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.
In addition, the form indicates if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). If your loan has a negative amortization feature, it appears in the description of the loan product.
You’ll need to go through the pre-approval process with a few lenders so you can comparison shop. For a loan as large as a mortgage, comparing lenders is very important.
Don’t worry about hurting your credit score with several loan applications. Multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry.
You can get multiple pre-approval letters by talking to several different lenders. The impact on your credit is the same no matter how many lenders you talk to (as long as the last credit check is within 45 days of the first credit check).
You will be charged a fee for pulling a copy of your credit report when you get pre-approved. You will also need to document your identity and your assets.
Not every mortgage or lender needs the same documents BUT there are some basics:
- Your driver’s license, Social Security number, marital status, contact information and address
- One month of pay stubs OR copies of the paperwork for your retirement or disability
- W2’s or 1099’s for the past two years
- 2 years of tax returns if self-employed
- 1-3 months of bank statements (all pages), for ALL accounts which will be used for the down payment and closing costs
- Your total monthly expenses, including all the bills you pay regularly
You may be required to provide other documents but these are the most common ones. If your lender calls and says they need something else, do not waste time getting it to them! I know it may be annoying or inconvenient but if you want to buy a house, this is what you MUST do.
There may be other paperwork that is needed but this depends on the mortgage and the lender. You should ask BEFORE the appointment so you take everything you need with you.
There are things you need to be aware of so you can avoid delays when getting a mortgage!
You need to have a written explanation for all deposits which are not identified on the Bank Statement. Federal law requires lenders to document and know the source of ALL deposits. Having these explanations ready can reduce the time required to approve your mortgage.
Also, you need to avoid making transfers between bank accounts you will not be using for the down payment and closing costs. If a transfer is made from one account into one of the accounts you will use to buy a home, the bank statements for that account must be provided as well.
Most pre-approval letters have a disclaimer such as:
This preapproval is issued based on your current credit history, income, assets and debt — assuming that there are no changes in your financial situation. This preapproval should not be considered a commitment to lend until the following conditions are met:
- A valid sales contract is initiated on a specific property.
- A satisfactory appraisal is completed on such property.
- You select a mortgage program, which allows your mortgage payment to fall within the preapproved amount
- A rate commitment is issued by our company under the above-referenced mortgage program
The letter will often state an approximate purchase price that you qualify for, and usually an expiration date, often within 90 days.
The Take Away on Mortgage Pre-Approvals
Many potential home buyers overestimate the down payment and credit scores needed for a mortgage. If you start the home buying process correctly, then you will get a Pre-Approval Letter. By doing this, you will KNOW exactly how much mortgage you qualify for!
Getting pre-approved helps you avoid many of the delays and stress that some home buyers experience.
Being prepared to buy a home means being Pre-Approved!