What Do Homebuyers Need to Know About Mortgage Pre-Approval?
Have you decided to take advantage of the low mortgage rates and dive into buying a home? One of the first steps in the process of homebuying is getting pre-approved for a mortgage. But what does getting pre-approved mean, and why is it an important step to take? Let us ease your mind and take you through the basics of mortgage pre-approval.
What Is Pre-Approval?
Before you apply for a mortgage, you’ll want to talk with a lender to get pre-approved. Pre-approval is the process in which you, a potential borrower, are evaluated by a lender to determine if you can secure a mortgage and to determine the type(s) of mortgage for which you would likely qualify. Pre-approval is crucial because it allows you to secure the type of loan you want while locking in your interest rates and term length. It also shows you how much you’re approved for, which can help you determine what you can afford in terms of housing.
What Is Pre-Approval vs. Pre-Qualification?
Before we jump into the steps of pre-approval, let’s take a look at a similar process called pre-qualification. During the pre-qualification process, your lender estimates what types of loans you’ll be approved for based on the financial information you provide them. Pre-qualification is different from pre-approval because the former is a more informal look at your finances that doesn’t require the lender to pull credit reports or verify your financial history. Pre-qualification is not necessary for pre-approval, and pre-approval holds more weight when it comes to submitting an offer on a property.
When Should Homebuyers Secure Pre-Approval?
Pre-approval should be the first step you take when you’re serious about buying a home. The ideal time for you to get pre-approved is generally three months before you plan to buy because it’s valid for 90 days. If you secure pre-approval but need to wait longer than 90 days to make an offer, don’t worry. As long as your finances haven’t changed much since you first received pre-approval, you’ll be able to get re-approved after it expires.
Now that you know what pre-approval is, what are the steps you should take before talking with your lender, and what should you expect to happen once you do?
Steps to Take Before Pre-Approval
There are certain steps you should take in preparation for the pre-approval process:
Note: Your lender will use the lowest credit score for you and your spouse if you’re seeking pre-approval together.
Having this information at the ready will help streamline the pre-approval process. As mentioned in step four, you’ll need to have specific documents prepared when embarking on the pre-approval process, which we’ll outline below.
Pre-Approval Documents and Next Steps
Once you’ve got all your financial ducks in a row, it’s time to move forward with pre-approval. Reach out to the lender who best matches your needs, and let them guide you through this process. Lenders want to get a full view of your financial history and stability, so they’ll be asking for a few documents from you. These include:
- Proof of identity
- Proof of income
- Tax returns
- Rental/housing history
- Credit history
- Bank statements
- Gift letters
- Any other financial documents
After you’ve gone through all the required documents with your lender, they will assess the risk associated with lending money to you via a mortgage. At this time, they’ll determine the interest rate and term length of your mortgage. Once they’ve assessed all of your finances, the lender will give you a pre-approval letter stating that they are willing to lend money to you up to a certain amount. Do keep in mind that this is not a guaranteed mortgage offer until it has been closed on, and, as mentioned earlier, your pre-approval is good for 90 days. Talk with your lender and your real estate agent to ensure you’re getting pre-approved at the optimal time in your homebuying search.
At any rate, don’t be afraid to reach out to your lender to ask questions as they arise. They are there to guide you through this process and make the journey of homebuying as streamlined and stress-free as possible. For a more in depth look at what you need to prepare for pre-approval, including tips on maximizing your pre-approval efforts, check out this free ebook!
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