Introduction to Mortgage Pre-Approval: Why You Need It
You’ve been browsing all over the internet looking through different neighborhoods and hoping to find your dream home. However, it seems as if there are so many things to do before you can take that next step in becoming a serious buyer. Between figuring out your price range, finding a good realtor, or setting up a meeting with a bank, you’re not exactly sure where to start. If this situation resonates with you, read on.
One of the first things a prospective homeowner should do before embarking on a serious house hunt is obtaining a mortgage letter of pre-approval. Arming yourself with this certificate shows that you’re not just window shopping, you’re also capable and committed to purchasing a home. Pre-approval can help you move forward with your search by pinpointing a specific mortgage amount you’d be approved for, placing you ahead of other homebuyers vying for the same home, and helping you understand your financial limits.
What’s the difference between a pre-qualification and pre-approval?
For many first-time home buyers, real estate terms like these can get a bit confusing. However, understanding the difference between pre-qualifying for a loan versus being pre-approved for one can bring you one step closer to becoming that savvy homebuyer we all strive to be.
While pre-qualification is also an initial step for those just beginning their mortgage journey, it’s less formal than being pre-approved. In order for someone to pre-qualify for a mortgage, they can simply meet with a lender either in-person, on the phone, or online, and provide an estimate of their income, assets, and liabilities. Based on the information you’ve given, the lender can give you a range of how much money you’re able to borrow. But that’s all it is -- a simple and quick estimate of the loan you may or may not end up getting approved for. Though this information is helpful when it comes to knowing how much you can afford to spend on a potential home, it doesn’t have much clout when you’re actually going through the mortgage process.
In comparison, the process of getting a mortgage pre-approval requires much more thought and formal preparation. It might seem like a hassle, but it’s actually a necessary step if you want to show sellers that you’re not playing around. A letter of pre-approval signals that you’ve already completed an official mortgage application, and it also shows sellers that you’ve undergone an extensive financial background and credit check. Compared to pre-qualification, which isn’t as thorough and rock solid, a mortgage pre-approval certificate shows that you have already been approved for a specific loan amount, and pretty much good to go!
What documents are needed for a mortgage pre-approval?
Though different lenders have their own requirements for what kind of paperwork you need to provide, you’re typically expected to provide official documents detailing your employment information, financial assets, updated credit score, and other major aspects that impact your income. Getting down to the nitty-gritty, you’ll most likely need to provide specific paperwork such as employment pay stubs, federal tax returns, your W-2, bank account statements, and other statements that outline your assets. A reputable lender will evaluate your financial history using this information and give you a specific loan amount. Proving you’re a serious buyer means providing some serious information, but in the long run, having a letter of mortgage pre-approval will put you ahead of the game.
How can I get started on obtaining a mortgage pre-approval?
According to the Consumer Financial Protection Bureau, most prospective homeowners only applied to one lender when they started their mortgage process. However, the same report showed that for those who shopped through three different lenders, they saved over $3,500 over a span of five years. Even though it’s not necessary to have multiple letters of pre-approval, it’s recommended that you meet with multiple lenders. Applying to several mortgage lenders allows you to compare rates and fees, and help you find a deal that best fits you. Having multiple offers under your sleeve can also give you leverage when you’re negotiating with individual lenders. However, be careful not to go through too many because it may result in a lower credit score.
Why is mortgage pre-approval so important?
There are several reasons why this letter of pre-approval matters during your home shopping process. The mortgage pre-approval certification can put you ahead of other buyers in the running for a potential home, and in today’s market, most home sellers expect prospective homeowners to provide proof of financing. Working with a lender can not only help buyers secure a home loan with reasonable interest rates and suitable terms, buyers are also able to explore financial options and budgeting in-depth. Pre-approval can let buyers know what their maximum loan amount is, and even give them a heads up if their credit is in trouble. Though it doesn’t seem like a big deal now, obtaining a letter of pre-approval from a lender might just land you that perfect house.