If you are buying your home through a mortgage, it’s recommended that you get pre-approval for a mortgage. A pre-approval document shows the amount of money a lender is willing to give for your home buying. However, there are specific criteria your home should meet. Additionally, your financial situation should also not change drastically during the home shopping period.
A mortgage pre-approval is not a compulsory requirement. However, getting a pre-approval makes the process of home-buying more efficient. The pre-approval process provides an opportunity to learn your loan options and budget.
By taking this step, you will be clear on your budget and the monthly repayments you can comfortably afford. Additionally, you will know if the houses within your budget are practical. You also save time as you can eliminate homes that are out of your budget range.
A pre-approval also shows sellers and real estate agents that you are serious and can afford a home. Sellers usually want to know if a buyer can follow through with the financing. A pre-approval, therefore, can work in your favor in comparison to a buyer without one.
A pre-approval is an examination of a buyer’s financial profile. A favorable financial profile quickens loan and mortgage pre-approval. Lenders base a pre-approval on the following key factors:
Most people use these two terms interchangeably. However, these terms don’t have the same meaning. Pre-qualification is an estimation of your loan amount—a pre-qualification results from a less prying credit check.
Pre-qualification involves a soft credit inquiry. No documentation is necessary for this process. Therefore, the lender only relies on your presentation of your financial situation.
For a pre-qualification, the lender requires an overview of the following:
Pre-qualification is helpful when shopping and comparing loan terms. However, it carries no weight as sellers and real estate agents don’t take it seriously.
A pre-approval, however, is a more detailed process. You need to fill out a mortgage application and provide your social security number. The lender will use this number for a hard credit check. Other requirements include:
With a pre-approval, the lender has checked and verified your documents. Furthermore, the lender has approved a specific loan amount. A pre-approval thus is more valuable than a pre-qualification.
During the pre-approval process, a lender assesses your creditworthiness. Then they determine the amount of money you can borrow and estimate your monthly payment. When you do a mortgage credit check, it is considered a hard inquiry on your credit report. This may impact your credit score, however, while you are browsing several lenders (approximately within a 45-day timeframe), this would be considered a single inquiry.
Pre-approval letters are valid for sixty to ninety days. The expiration time is because a buyer’s finances and credit profile may change. After expiry, you need to fill out a new mortgage application form for a new pre-approval. You also need to submit updated paperwork.
It is advisable that you seek a pre-approval six months to one year before a serious home search. Within this time, address any credit issues identified and improve your credit profile. You also get more time to save for down payment and closing costs.
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The time to pre-approve depends on the lender and your financial complexities. You can get a pre-approval within hours or even several days later. The first step in the application process is filling out a mortgage application. This application includes your identifying information and social security number.
The mortgage application has eight main sections, as listed below.
Refers to the particular loan product you are seeking. This section includes the loan amount and terms. These terms include the loan repayment duration and the interest rate.
Includes the following information:
Your identifying information, including:
This section includes:
This section is an overview of significant transaction details, including:
Declarations are an inventory of:
Your lender will provide you with a three-page document (loan estimate). The law requires the lender to do so within three working days of receiving your application. The loan estimate shows if you have a pre-approval and outlines the following:
Once your application closes, your loan file goes to a loan underwriter. The underwriter will review all documents against the information on your mortgage application. The scrutiny ensures that you satisfy the requirements of each mortgage program and any special guidelines for each loan program.
You also need to put together documents to verify the information you provided. The documents required are the following:
It is essential that you understand what lenders assess in your financial profile. This information will help you maximize your chances for a pre-approval. These factors include:
The two main categories of mortgage loans include conforming and non-conforming. These two categories are further broken down into five sub-categories, including:
After reviewing your application, a lender makes any of the following three decisions: