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Top 3 Reasons to Get Pre-Approved for a Mortgage
Planning to buy a home in Port St. Lucie?
Looking for a new home in Port St. Lucie can be fun and exciting. If you've been planning to be a homeowner for years now, the process of home selection is thrilling and one you've surely highly anticipated.
Before you get carried away dreaming about your life and even before you start your home search, you need to know how much you can afford.
Why? Because you may fall in love with a house only to be disappointed and heart-broken later on when you find that you can't afford it!
There are two ways to do this: with a mortgage pre-qualification and a mortgage pre-approval.
What is a Mortgage Pre-Qualification?
A mortgage pre-qualification is an estimate of what you might be able to borrow based on the financial information you provided the lender.
Getting a mortgage pre-qualification means giving the mortgage lender your general financial history including your debt, income, and assets. The lender will then review your information and give you an estimate on how much you can borrow.
Pre-qualification is usually free and can be done over the phone or online. This process is fast and simple. Three days is usually enough to get a pre-qualification letter since it does not include an in-depth analysis of your credit report nor your capability to buy a home.
Pre-qualification is usually regarded as a first step in taking a mortgage. Once you receive your pre-qualification, you can proceed to discuss with your lender your mortgage goals. This is the time to learn the various mortgage options available and to decide on which one is the best suited for your requirements.
Pre-qualification is not a sure thing. It's just an amount that says you may expect to be approved. It does not carry the same weight as a pre-approval, nonetheless, don't disregard the importance of a pre-qualification.
The following information will be needed for a pre-qualification:
Basic information on bank accounts
Down payment amount and desired mortgage amount
What is a Mortgage Pre-Approval
A mortgage pre-approval is a statement of your creditworthiness and is released by a lender or bank after a loan officer has closely evaluated your finances and determined how much money you can borrow, as well as how much you can pay monthly.
To get a pre-approval, you need to complete a mortgage application, provide the lender with all the important documentation so they can do an intensive financial check and credit rating. Once your documents are reviewed, the lender can pre-approve you for a specified amount.
Some lenders charge for a pre-approval application, which can amount to several hundred dollars.
Your pre-approval is a conditional commitment in writing for an exact loan amount. You can look for homes below or above the price indicated. Ideally, look for homes in the midrange so you'll have some funds remaining for closing costs, home repairs, and updates if you want to change something in the house, or some savings.
To get a pre-approval, here are some of the things you need to prepare:
Social Security Number - The lender should be able to verify your identity, request tax returns info, and pull up credit reports.
Proof of employment - You need to show that you are employed (for at least two years) because having a job means you have the ability to repay the loan.
Proof of income - You have to show proof of your recent earnings (most likely your pay stubs for the last 2 months). Lenders are interested to know your average annual income, and if you have any other additional income.
Tax documents - You would also have to turn in your tax documents for the last two years which includes your W-2 statements and tax returns.
Bank statements showing you have money for the down payment and closing costs.
Credit information so the lender can measure your debt-to-income ratio.
List of monthly expenses that can help lenders check your debt-to-income ratio and your ability to pay the loan.
Is mortgage pre-qualification the same as pre-approval?
These two financial terms are not interchangeable.
The mortgage pre-qualification is based on what you tell the lenders and does not always require detailed documentation of your financial history.
Pre-approval, on the other hand, requires documentation of income, assets, and debts. The mortgage lender digs deep into your finances before they give you a pre-approval.
Which one should you get if you are planning to buy a home?
If you are just in the planning stage of buying a home and would like to know your budget and want to have an idea of how much you can borrow, a pre-qualification is a good idea.
If you’re a committed home buyer who would like to make an offer when you see the house that fits your requirement, get pre-approved for a mortgage.
How Pre-Approval Helps You as a Home Buyer
One of the main differences between mortgage pre-qualification and mortgage pre-approval is how the lender gives you the mortgage amount.
For pre-qualification, the lender gives you a mortgage estimate.
For pre-approval, the lender gives you the exact loan amount.
Here’s how pre-approval helps you as a home buyer:
1. You Learn Exactly What You Can Afford
There are no estimates in a pre-approval. The lender has looked into your credit history and you've given the required documentation to go through with the pre-approval process.
A mortgage pre-approval is not a commitment to the loan, but it paves the way to transition into applying for a specific property your dream home in your price range.
If you are pre-approved for a $300,000 loan, that means you need to look for a home that's less than that amount.
You need to also keep in mind that there are other costs involved in home buying other than the price of the house. You have to take into consideration your household expenses and other financial responsibilities and make sure you save some money for these sleeper fees.
2. You Can Narrow Your Home Search
Searching through online listings can be a tedious process, especially if there are hundreds of homes for sale in the area. How do you narrow down your home search? When you're pre-approved, you'll know exactly what you can afford, and tailor your home search around the mortgage amount. Now you can easily search through the listings with confidence and renewed energy. It will also save you unnecessary heartache and disappointment you’ll surely feel if you start looking at homes without knowing how much you can afford.
3. The Home Seller Takes Your Offer Seriously
Home sellers like to see that you're pre-approved because it tells them that you're serious about buying their home. So when you're competing with other home buyers to make the best offer on your dream home, being pre-approved will give you a competitive edge over buyers who are not. Then you can focus on moving into your new home!
When should you get pre-approval?
The best time to get a mortgage pre-approval is when you're confident that your credit reports and score are in good shape. Preapprovals typically last for 60-90 days only because your credit report can change within that time period.
If you're planning to buy a home, get pre-approved six months to a year before.
How to ace your mortgage pre-approval
When you want to ensure your success in getting pre-approved, here are some things you need to do:
Check credit score and credit report. The best thing to do before you get pre-approved is to check your credit report and credit score. You're entitled to get a free copy of your credit report every 12 months from each of the three nationwide bureaus. Do this at least six months before you go house hunting to give yourself time to address any issues.
Fix mistakes. If you see any outdated information or incorrect entries, contact the credit reporting agencies. This can take time so make sure that you have a strong credit history so you can get approved and avail of the best rates.
Pay your debts! Pay ALL of your bills on time and in full every month. Prioritize debts that can affect your score. For example, delinquent collection accounts have a more immediate impact on your credit score than payment for credit cards.
Have a consistent income for two years. The mortgage lender will require you at least two years' worth of tax returns and bank statements to show consistent income deposits. Expect to show your payslips, tax returns, and other financial paperwork.
Create a budget and stick to it. Spending can be fun, but if your goal is to buy a house, you need to rein in your spending and stick to your budget. Avoiding large purchases lowers debt to income ratio and help you qualify for better interest rates.
Commonly Asked Questions About Mortgage Pre-Approval
Here are a few other questions I get from home buyers about pre-approval:
1. Should I get pre-approved from multiple lenders
Shopping with different lenders allow you to compare loan costs, explore program options, and experience lender's customer service before committing to the expensive and complex mortgage approval process.
Financial experts recommend that you apply for a loan pre-approval from several lenders, but going to more than three lenders is a waste of time because loan offers beyond this will have only very slight differences.
2. What questions should I ask a mortgage lender?
Ask which loan is the best type for you and why? Lenders should find out things about you before throwing out loan options.
Ask the lender to explain about fixed-rate loans, adjustable-rate loans, interest rate loans, and negative amortization loans. Learn which one is the best fit for your personal circumstance.
Ask what is the interest rate and annual percentage rate.
Ask how much downpayment is required. Most lenders require 20% but you get away with as little as 3% depending on the type of loans.
Ask about discount points and origination fees. Understanding about points and origination fees will help you know where your payment is going.
Ask about third-party vendor fees like appraisals, credit report, title policy, recording fees, etc.
Ask about loan rate lock. Interest rate change daily, so locking your loan is a good idea if you think interest rates are moving up.
3. Can I switch lenders after pre-approval?
Yes, you can switch lenders at the last minute, but doing this has two possible downsides. it could tie up the sale and cause it to fall through.
4. Can a pre-approved mortgage fall through?
Yes, your mortgage can also be denied after pre-approval for the following reasons:
Change of employment - Some lenders require certain for a specific time length with a consistent employer. If there are gaps in your employment history, you have to write an explanation that should be verified and approved by the mortgage underwriter.
Negative item on credit - You don't need a perfect credit score to buy a home, but you do need a good one. If your credit score is in the low 600's, you need to be careful and make sure to pay all your bills on time.
Incurring additional debts - There's a good reason why pre-approvals only last up to 90 days. Its because you may add up additional debts or credit lines in those three months which will make home payments more challenging. Lenders are constantly checking your credit score so don't add any debts.
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