A mortgage pre-approval is a document written by a lender that you will include with an offer to purchase a home. It lets the seller know that a lender has looked at your finances and is willing to lend you money to purchase the home. Included in the pre-approval are: type of mortgage; length and terms; interest rate; and amount they are willing to lend you.
If you’ve decided to start looking for your first home, you’ve probably heard the term “pre-approval” thrown around quite a bit. But what exactly does pre-approval for a mortgage mean, and why is it important?
In this blog post, we’ll answer these questions and more, so you can feel confident and prepared as you navigate the home buying process.
What is Pre-Approval for a Mortgage?
Pre-approval is a process that involves a lender reviewing your financial information and determining whether or not you are eligible for a mortgage loan.
This process typically involves submitting an application, providing documentation of your income and assets, and allowing the lender to run a credit check.
If you are approved, the lender will give you a pre-approval letter that outlines how much money you are eligible to borrow and at what interest rate.
Note: These pre-approval letters are usually good for three months. If your pre-approval letter has expired, just give your lender a call. He’ll do a quick check in of your finances and write up a new one for you.
“Keep in mind that a pre-approval is not the same as a pre-qualification.”
A pre-qualification is a less formal process that involves a lender taking a cursory look at your financial information to give you a rough idea of how much you might be able to borrow.
Pre-approval, on the other hand, is a more in-depth process that gives you a much more accurate picture of your borrowing power.
So, don’t even both getting a pre-qualification letter from a lender. Go straight to a pre-approval and the homebuying process will go so much smoother.
Why is Mortgage Pre-Approval Important?
You might be thinking, “Can’t I just start home shopping without a pre-approval?”
“Yes, you definitely can!”
And I actually recommend this when you’re not quite ready to go all in with home buying. If you just want to ‘dip your toes in the sand’ so to speak.
You can start looking at homes online. That way, you start researching things like:
- The areas you want to look in
- What homes are like in those areas
- What prices are like
- What sizes and styles appeal to you
- How long are homes staying on the market
- Etc.
All before you get pre-approved.
Then when you are ready to start home shopping seriously, here are the reasons why you’ll need one:
Just a quick note that when you are ready to start home shopping seriously, this is a good time to find the right real estate agent to help you.
We have an article here at New Homebuyer Academy all about finding the perfect agent for you.
And he or she can even give you names of lenders that they recommend.
“A Pre-Approval is One of the Most Important Steps in the Home Buying Process!”
1. It Helps You Understand Your Budget
When you get pre-approved for a mortgage, you’ll know exactly how much money you can borrow.
This will help you set a realistic budget for your home search and avoid falling in love with a house that’s outside of your price range.
2. It Makes You a More Competitive Buyer
In a competitive housing market like we’re in, sellers are more likely to choose buyers who have been pre-approved for a mortgage.
This is because pre-approval signals to the seller that you are serious about buying a home and that you have the financial means to follow through on your offer.
3. It Can Speed Up the Closing Process
Because you’ve already been through the pre-approval process, your lender will have much of the information they need to finalize your loan.
“This can help speed up the closing process and get you into your new home more quickly.”
Now that you understand why pre-approval is important, let’s talk about how to get pre-approved.
What Are the Basic Steps to Getting Pre-Approved for a Mortgage?
Step 1: Gather Your Financial Information
Before you apply for pre-approval, you’ll need to gather some important financial information.
This may include:
- W-2s or 1099s from the past two years
- Pay stubs from the past two months
- Bank statements from the past few months
- Tax returns from the past two years
- Proof of any additional sources of income (such as rental income or child support)
- Information about any debts you have (such as credit card balances or student loans)
I know – so much work!!!
For many homebuyers, this is the worst part of the entire process. But, just think – once you dig out all of this information and paperwork, you’ll be so much ahead in the process.
Step 2: Choose a Lender and Fill Out an Application
Once you have your financial information in order, you’ll need to choose a lender to work with and fill out an application.
You can choose to work with a bank, credit union, or mortgage broker.
We have an article here at New Homebuyer Academy that can help you figure out which type of lender you might want to go with.
“Be sure to shop around and compare rates and terms from different lenders to make sure you’re getting the best deal.“
When you fill out the application, you’ll provide the lender with all of the financial information you gathered in step 1.
You’ll also need to provide personal information, such as your social security number and employment history.
Step 3: Wait For the Lender to Review Your Application
Once you’ve submitted your application, the lender will review all of the financial information you provided, along with your credit score.
They will also likely ask for additional documentation or clarification on certain aspects of your financial situation, so be prepared to provide that information as soon as they ask for it.
“You won’t have to wait long for your pre-approval.”
As long as you get them the documents and information they need, they’ll work really quickly to get you the pre-approval. Usually within a few days.
Some lenders can even get it done quicker. They understand that the housing market moves quickly these days!
Step 4: Receive Your Pre-Approval Letter
If the lender determines that you are eligible for a mortgage, they will provide you with a pre-approval letter.
This letter will outline the amount you are eligible to borrow, as well as the interest rate and other terms of the loan.
It’s important to review this letter carefully and make sure you understand all of the terms and conditions.
And whatever you don’t understand in it, the lender will be able to explain it to you. In fact, if they are not able or willing to explain anything you don’t understand, then they most likely are not the lender for you.
“There are plenty of lenders and mortgage companies out there that are extremely helpful.”
Step 5: Begin Your Home Search
With your pre-approval letter in hand, you can start your home search with confidence.
Keep in mind that just because you’re approved for a certain amount doesn’t mean you have to spend that much.
“It’s important to stay within your budget and find a home that you can comfortably afford.”
You’ll work closely at this stage with your real estate agent and your lender, who will both guide you through all the steps in the process.
There are plenty of articles here at New Homebuyer Academy that can teach you about the different steps involved. And can show you how to find the right real estate agent for you.
Step 6: Finalize Your Mortgage
Once you’ve found the home of your dreams, you’ll need to finalize your mortgage with your lender.
This will involve submitting additional documentation, such as an appraisal and title report, and agreeing to the final terms and conditions of the loan.
It’s worth noting that pre-approval is not a guarantee that you will be approved for a mortgage.
Your lender will still need to review your financial information and the specifics of the property you’re interested in before finalizing the loan.
“Then at the end of all that work preparing for your mortgage, the lender will let you know you are Clear to Close!”
This is a great day to celebrate. It typically happens one week before the closing date and it means you are officially good to get that mortgage and purchase your new home!
So to wrap it all up, a pre-approval is one of the best first steps you can take when you are ready to buy your first-home. It helps you understand your budget, makes you a more competitive buyer, and can speed up the closing process.
By following the steps outlined above, you can get pre-approved for a mortgage and start your home search with confidence.
Good luck!
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Stay tuned for more articles on all the ins and outs of home buying for first-time homebuyers.
If you’d like to ask me any questions, email me anytime at: paula@michaelandsullivan.com.
Or call: 774-287-5852
Paula