When you start house hunting, getting pre-approved for a mortgage can be one of the most critical and determining steps in your house buying process. Without mortgage pre-approval, you probably don’t stand a chance at buying a decent house (or any house at all, for that matter.)
Having a pre-approved mortgage guarantees the person selling his house that you are a qualified buyer. It gives you a clear idea of affordable prices and shows the seller that you are serious about buying. Prior approval can also shorten the time to settle the loan.
In short, mortgage pre-approval is necessary when you go house hunting as it helps to take the pressure off your home search, making it easy, fun, and exciting.
What does mortgage pre-approval mean?
A pre-approved mortgage helps your lender determine whether you are credible for a loan. The lender will assess your financial situation and your affordability. These details will help him determine the type of mortgage loan you qualify for keeping in mind the interest rates.
Mortgage pre-approval gets you one step closer to buying your dream home by playing a crucial role in ascertaining your success in the housing market.
Pre-approval vs pre-qualification: What’s the difference between mortgage pre-qualification and mortgage pre-approval?
Pre-qualification means that the lender has carried out an informal credit check to determine if you are eligible for a loan or credit card. Based on the information you provide about your credit, debt, and income, the seller estimates the amount you can request for a mortgage. Mortgage pre-qualification is basically like an audition, giving you the opportunity to explore your mortgage options.
Mortgage pre-approval is an actual attempt at getting a loan. Getting pre-approved means you have also submitted all the necessary documentation on income and assets for review. It takes a little longer and requires more work on your part.
For pre-approval of mortgage, you will need to fill out an application and submit it along with other supporting documentation. Pre-approval is like a step-up in the house buying process.
How long till you get pre-approved for a mortgage?
It depends mainly on your financial situation. Usually, a pre-approval letter takes about one to three days to be assessed and then approved or rejected.
You need to keep the following things in mind while applying for a mortgage:
- You will receive a letter as evidence that your mortgage application has gotten pre-approved. However, the letter expires after 30-90 days so you should think better than to consider applying for mortgage pre-approval way before you decide on buying a house – you will have to get it re-verified.
- Never apply for a loan that is way above your pay grade. Decide how much you’re comfortable paying each month for your mortgage.
- Do not change jobs while applying for mortgage. Keep your income steady. If you rack up more debt, or reduce your savings, you could get denied your final mortgage.
How can you get a mortgage pre-approval?
As the mortgage process might have left your brain feeling a little fuzzy, to help clear up the fuzz around mortgages, here’s a simple 8 steps process to help you out:
- Application submission
Fill out a 1003 mortgage pre-approval form. You could do It online, over the phone, or in person. The lender will ask for documentation needed for mortgage pre-approval to support the information on your loan application. He might also look at your character or your willingness and capacity to pay back the loan.
- Checking your credit history
Your mortgage lender runs your credit report with the three major credit bureaus using the middle score and throwing out the high and low scores.
- Calculating your debt-to-income ratio
Calculate your debt-to-income ratio before getting pre-approved. You can easily calculate through several online calculators or simply take your total debt figure and divide it by your income. This ratio is expressed as a percentage, and the loan officer uses it to determine if you can afford to pay back a loan. It is desirable to have as low a DTI figure as possible.
- Reviewing loan programs
Your lender will review with you all available loan programs and help you to decide what is best for your situation. Programs include conventional, Federal Housing Administration, Veterans affairs US Department of Agriculture and Jumbo loans.
- Gathering your documents
You will need to provide identification, bank statements, paycheck stubs, w-2s, tax returns and more depending on the situation.
- Processing
Loan processors will verify your documentation.
- Underwriting
Underwriters may seem like wizards but really, they just verify that your loan meets all loan program guidelines and may ask for additional documentation as needed.
They complete the pre-approval process using a universal automated underwriting system. It provides a computer-generated loan decision.
- Closing day
This takes place at an attorney’s office. You will sign the closing documents. These include the note for the buyer’s promise to pay back the loan and the deed of trust confirming that if the buyer does not follow through on the terms of the loan the lender can foreclose.
Why get pre-approved?
- You know your options
A pre-approved mortgage can forewarn you about potential problems while buying a house. It can help you set genuine expectations about what kind of a house you can afford to buy.
- Avoids disappointment
Nothing is worse than finding your dream home, only to realize later that you can’t afford it. You should consult a loan officer and let them guide you through your possible options before you start looking for houses that are not within your range.
- Establishes your credibility as a buyer
With a pre-approval letter, you are letting the sellers know that you are serious about buying a house and that you are financially stable. This would give you a strong hold while negotiating.
If there are multiple buyers for the same property, the letter might give you benefit over other buyers who have not been pre-approved.
- Lowers your interest rate
If your credit score is good, the interest rate charged on your pre-approved mortgage is lower than what would be charged if you apply for the loan otherwise.
When to get pre-approved for a mortgage?
The most favorable time to get pre-approved is just before you start house hunting. By verifying how much you’re qualified to borrow, preapproval helps you decide what you can afford.
Before getting pre-approved, keep in mind the following:
- haven’t racked up any debts
- should never take out a mortgage that’s longer than 15 years.
- should strive for a down payment of at least 20%.
A preapproval letter will help you stand out in the housing industry. In other words, there are very few shortcomings and many advantages of pre-approval.
