The Pre-Approval Process

The Pre-Approval Process

There’s a reason homebuyers are always hearing that they should get pre-approved before shopping for a home, and yet, many buyers still choose not to get a pre-approval. Obtaining a pre-approval from a mortgage lender gives lets you know exactly how much money you can afford to spend on a house and how much those monthly mortgage payments will be. It also strengthens any offers you make by letting the seller know you are a qualified buyer making a legitimate offer. Having a pre-approval before you begin searching for homes will make the remainder of the home buying process significantly easier for not only yourself, but for all parties involved.

So how exactly does one get pre-approved for a home loan?

Getting Pre-Approved

There are quite a few factors that a lender must consider when deciding whether to approve a borrow for a home loan. The main points of interest are:

  • Credit score
  • Debt-to-income ratio (DTI)
  • Credit history
  • Employment and other sources of income
  • Assets
  • Liabilities

After reviewing all of these aspects of your finances, the lender will decide whether or not to approve you for the loan in question. It’s important that the borrower does not make any significant purchases, open up new lines of credit or change employers during the application process. This could result in application being denied.

Usual Documents Needed

With applying for a mortgage comes gathering documents. Necessary documents vary by lender, but typically include:

  • Copy of valid identification
  • Copy of social security card
  • Two months of bank statements
  • Employment verification
  • Two most recent pay stubs
  • W-2s from past two years
  • Federal tax returns from past two years

Organization on the borrower’s part will help create a smooth and easy process for the underwriters.

The Decision

After carefully looking over your application and the documentation provided, the lender will typically give one of three decision; pre-approved, denied, or pre-approved with specific terms. If you’re pre-approved, Congratulations. It’s time to start shopping. If you’re denied, the lender will identify what specifically caused the denial and will usually provided you with resources to fix the issue. Typically, borrowers need to improve their credit score. If you are pre-approved with specific terms, you may need to provide additional documentation or pay down off existing debt.

The Official Pre-Approval Letter

Should the lender decide to pre-approve you, you’ll be provided an official letter indicating the loan amount, interest rate, mortgage program, and expiration date. Remember, just because you’ve received a pre-approval from a specific lender does not mean you are contractually obligated to use that lender. You can shop around and see which lender will give you the best deal and interest rate. Credit inquiries done within 45 days of each other won’t have a significant negative affect on your score.

When Should I get Pre-Approved?

Deciding when to get pre-approved varies from person to person. Some lenders can approve a loan within a day, others may take a week. Typically, a pre-approval is good for two to three months, depending on the lender’s terms. This is because one’s financial situation could change from the time the loan is approved. If the loan offer expires, the borrower will have to re-apply.

If you are aware of issues with your credit history, applying for a loan could help you identify the issues and allow you time to fix them. The more time between your initial inquiry and doing your serious home shopping, the more time you have to address credit problems. This will also help you better prepare for closing costs and your initial down payment.

Is a Pre-Qualification the same as a Pre-Approval?

It’s a common misconception that a pre-qualification is the same as a pre-approval. This is not the case. A pre-qualification is a simple overview of your finances that the lender uses to give you a rough estimate of how much you can afford.  The lender does not verify any of the information provided to them and does not run a credit report. That’s not to say a pre-qualification isn’t useful or a good starting point, but there is no legal significance to a pre-qualification.

Sources:
https://www.investopedia.com/mortgage-preapproval-4776405
https://www.moneycrashers.com/getting-approved-mortgage-loan/
https://www.nerdwallet.com/article/mortgages/how-to-get-a-mortgage-preapproval

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