The first thing you need to know before setting out on your Mortgage journey for a new home is knowing the how and why of getting a Pre-approval and the importance of this step. The Pre-approval will not only give you an accurate picture of what you are looking at financially but convey the seriousness of your offer to buyers.
What is a Mortgage Preapproval?
By definition, a mortgage pre-approval is an accurate calculation by the lending party of how much you will be able to spend on a new home. The lending party makes these calculations by considering all of your valid financial information such as credit history, earnings, debts, and so forth.
Essentially a pre-approval is a formal yes for lending you the money when you find the right home. However, your house will still need to pass the appraisal inspections. Until you finalize your property of choice, all your payments will be based on an estimated interest rate. While the Pre-approval will not ensure that everything is set in stone, it will convey your seriousness and financial capability to the seller.
Preapproval vs. Prequalification
Although these terms are used interchangeably, they do have different meanings. Let us define what each means.
In a Prequalification, the lender will check all your debts and pull your credit scores to ensure that you are not in over your head and ask for estimations of your earnings and assets to estimate your debt-to-income ratio. This will give them a picture of where you fall in the bracket of eligibility.
A Pre-approval can be seen as a more detailed, trustworthy, and accurate approval instead of a pre-qualification. They will take everything from a Prequalification into account while including things like your financial statements and tax returns.
While Prequalifications can get you a ballpark figure, agents and lenders prefer the more accurate and verified numbers of a Pre-approval. Unverified figures pose a potential risk in markets such as the U.S. with low inventory.
The Prequalification Approval is similar to a prequalification in that it operates on estimations and not verified documentation. It is highly recommended to get a Verified Pre-approval where all your documentation is verified and nothing is hidden so that you may have the assurance and confidence of a Mortgage Preapproval.
What is a Mortgage Pre-approval letter?
When you are successful in obtaining a Pre-approval letter, you will be issued with a letter that contains the following aspects:
● The total of your Pre-approval.
● The expiration date of the letter, which is usually 90 days after it has been issued.
● The duration of the loan option that has been chosen.
● And whether or not all of the information has been verified.
It is important to remember that purchasing a new home is a negotiation in which you may not want the prospective seller to know that you have a much higher Pre-approved rate than what they are asking. This information can always be altered once you have been given your Pre-approval to benefit you in your negotiations.
Why is a Mortgage pre-approval important?
The main point and importance is the edge that it can give a purchaser; not only does it convey the seriousness of your offer and give the seller reassurance of your eligibility, but it will also give you the much-needed confidence to proceed. It can give you an advantage over the other bidders on a property. This can be a deciding factor for the seller.
Agents and sellers are also more inclined to take your offer seriously, knowing that the deal will not fall through when you have a Pre-approval letter and thus are not wasting their time.
A pre-approval will also ensure that you do not let your dream property slip through your fingers in a highly competitive market. In a market where sellers are looking for the best offer, home loan security will be your best bet, especially when competitors are willing to pay cash upfront.
Think of having Pre-approval in your back pocket as assurance for you to house hunt knowing and understand what you can afford. Things such as appraisals can halt the process. It's better to have control over the things you can, like your pre-approval.
How to get Pre-approved for a Mortgage-
The first step, now that you understand what Mortgage pre-approval is to get your finances in order.
● Check your credit and be sure of where you stand.
Possible Lenders work with your minimum score eligibility. Using tools that will help you calculate your vantage or FICO scores can help you with this aspect. Attaining your credit scores from a known scoring company will highlight possible errors that can cause issues.
Paying off your debts to the best of your ability will help with your Debt-to-income ratio and give you the best chances of qualifying.
● Secondly, making sure that you have the appropriate documentation accessible will save a lot of time. Normally you will be asked for. All of your relevant income may include, Two-three months of paystubs, two years of tax returns and W-2's, as well as 1099 of applicable. As far as assets go, be prepared to provide the last two months of any bank accounts you intend to use as well as any fallbacks in money should a problem arise.
In the case of self-employment, be prepared to provide two years' worth of business tax returns. Due to the instability caused by Covid-19, you may be asked for audits as well as unaudited income statements.
● Shop around. When purchasing a new home, it is a good idea to look at all the options available. There are two reasons for shopping around-namely, financial comparisons and comfort. When shopping around, you will see two rates; the lower rate is based on your monthly payments. The higher rate takes into account the base rates plus other costs. The higher the difference between these two costs, the more you will pay in the end. As for being comfortable, you should make sure that the place you choose will serve you and proactively act on your behalf to make sure that you are getting the best deal and rates possible. Will they meet all your needs and go above and beyond?
Mortgage Pre-approval frequently asked questions.
1) When should I begin the process?
The second you decide to purchase a new home. Starting the process as soon as possible has many benefits.
2) Why do Lenders Put an expiry date on Preapproval Letters?
A Pre-approval letter is only valid for that point in time. Your finances can change in a short space of time. Your information of three months prior may no longer be relevant at this point and, therefore, will not give an accurate picture.
3) Will Multiple Pre-approval applications hurt my credit score?
No. you should not be penalized for shopping around. Just be sure to complete all of your applications within 30 days of your initial inquiry.
Interested in getting prequalified? The application is easy and seamless. Just hit the apply now button and get started today.