Now that you have checked your credit report and taken necessary steps to improve your credit score, the next thing that is suggested is to go to a bank or lending institution and apply for pre-approval for a mortgage. If you do not know your credit score yet, I suggest going to Profinity to get your score.
Remember, a mortgage pre-approval is optional. However, it is very handy in the home buying process.
Shopping for a house with a pre-approval in hand gives a potential buyer a very important upper hand in the process and will open up more opportunities than those without a pre-approval.
What is a Pre-approval?
It’s easy to describe what a pre-approval is not. It is not a loan approval.
A pre-approval is a letter from a lending institution that tells a home seller that the potential buyer has verified credit, bank documents and employment records. It is a non-binding letter on the lender, because the final approval is contingent on other factors – including the appraised value of the property.
What are the Benefits of a Pre-approval?
When a house-shopper has a pre-approval letter, he or she has a guideline of how much home can be purchased. Knowing this information can save the home-shopper and a real-estate agent time in searching for the right home. The agent can present available homes that fit within the price range, rather than suggesting every home that meets certain criteria – neighborhood, schools, bedrooms, etc. A pre-approval tightens the criteria for a good purchase, meaning the buyer is more likely to find the right home sooner – saving time, money and effort.
The pre-approval letter also shows the seller that the buyer is serious. This puts the seller just a bit more at ease if they accept the offer—that the loan would be approve and the house would be sold. It is somewhat of a form of home-purchase insurance for the seller, which lessens risk. The seller might actually accept an offer that is less that asking price if the offer comes from a pre-approved bidder, because it’s more of a sure thing than a higher offer that does not have pre-approval.
Pre-approval vs. Pre-qualification
Potential homebuyers can get pre-qualified or pre-approved. There is a big difference between the two – they are not synonymous.
While pre-approval is a verification of a person’s ability to pay a loan, a pre-qualification is a loan officer’s opinion – it does not address any specifics about a loan amount and does not include a full assessment of a potential buyer’s financial health.
What is the Pre-approval Process?
There is a process to get a pre-approval letter, because the concept of verification takes some time. To get pre-approved, a potential homebuyer should sit down with a loan officer and do the following:
- Discuss with the officer the process and any and all likely out-of-pocket costs.
- Discuss financials, credit and any special circumstances (starting a new job, past employment, receiving gifts or inheritance, etc.)
- Homebuyer fills out loan application and officer checks the credit report
- Homebuyer provides the following documents:
- Paycheck stubs (at least 2-3 months)
- W-2’s (at least last year or two)
- Tax returns (last couple years)
- Bank statements
- Letter of explanation (if something needs explaining)
- Officer reviews documents and makes appropriate contacts to confirm information (check on employment dates, type of compensation, etc.)
Once all these steps are satisfied, the loan officer then submits a pre-approval letter. Once you have your letter and you’re about to shop, check back here to learn more about down payment options for your mortgage.