If you are serious these days about buying a house or even just looking at a home, there is one thing you’d better get – a mortgage preapproval. It could be your golden ticket to winning a bid for your dream house.
“Successful real estate agents want to see a pre-approval letter and want to see that letter coming from a local banker or mortgage person that they know rather than seeing it from one of those online lenders,” says Steven Bogan, regional managing director of Glendenning Mortgage Corporation in Toms River, N.J.
What is a mortgage pre-approval?
A preapproval involves the same steps as a mortgage application — you’ll provide detailed information about your income and assets that will be reviewed by the lender’s underwriters. If pre-approved, you’ll get a conditional commitment by the lender for a specific loan amount.
What can a pre-approval do for you?
“If you can get an offer to the homeowner, it says ‘here is my bank statement and I have enough to cash and good enough credit to buy your house,’ ” he says. “A pre-approval just helps with less aggravation and less work for everyone in the transaction.”
A pre-approval also tells your real estate agent and yourself how much house you really can afford. But remember not to actually buy a house for the top level of your affordability. You need a stash of cash for many things once you buy a house such as an emergency fund for when things go awry or for new furniture or a lawnmower.
What is the difference between pre-qualified and pre-approved?
Bogan says there is no official definition in a glossary somewhere from Fannie Mae or Freddie Mac specifically. The names can vary from realtor to realtor and lender to lender. So, you want to deal with a company or bank which looks into certain things in your credit history and your income to write a good pre-approval.
Generally speaking, though, starting with a pre-qualification is a good idea. This usually requires less information, and it gives you an idea of how much money you might be approved for.
Who does pre-approvals, and how can you pick the right lender for this step?
Lenders from all sorts of institutions from banks to credit unions to mortgage corporations offer pre-approvals and mortgages.
“We encourage people to reach out to people they know such as friends who bought a house recently,” he says. “You can talk with your financial planner, attorney or accountant that you trust and get some feedback from them.”
What items does the lender need for a pre-approval?
The documents to get pre-approved are the same documents that you would need to get a mortgage. Bogan says the documents usually asked for include:
- 30 days of pay stubs
- two years of tax returns along with the W-2s or 1099s
- two months of savings and checking account documents
- anything to do with your 401ks
You will need to provide explanation and documentation of funds that were deposited that aren’t associated with your pay stubs. The lender will also need to pull your credit report.
Also, before ever talking with a lender, make sure you understand your own financial picture. Do you pay your bills on time? Do you understand how much debt you have, and how high is your credit score? Did you default on a student loan? Do you have way too much debt on credit cards? Sometimes, lenders can help you with getting you on the right track credit-wise to get the best interest rate and loan.
Does it cost anything to get a pre-approval letter?
The only thing a lender can collect for is the cost of pulling your credit report, which is usually $50 or less, Bogan explains. Some don’t charge anything at all.
How long does it take to get a pre-approval letter?
“That depends on how strong of a buyer you are,” Bogan says. “For someone who produces the information that is requested and doesn’t have a lot of moving parts, it can be done in less than an hour.”
If it is a complicated case and all of the documents weren’t given, you should still have a response back within 3 days. If it is taking longer than that because they are so busy, that should raise some red flags. Will they be able to prioritize your loan for your contractual obligations? Some places get so understaffed because they have been offering such a great deal on mortgages, he says.
Do people usually use the person they got the pre-approval from to get their mortgage?
“At this point, you have started a relationship. You are turning over a substantial amount of private information. The decision usually has been made in your mind to use this person for the loan,” Bogan says.
It is very much a competitive industry. There is no place for second place, he says. But he adds that when you see that some lenders are offering deals so much lower than everyone else, then you need to really ask yourself some questions, read all the fine print and go with your gut, not the interest rate.
Does the amount of a work a lender does upfront for the pre-approval indicate how often people will close on a home?
Absolutely, Bogan says. “Our approach is that we want everything to go smoothly. If lenders take more time on the front end, it’s usually a done deal short of the appraisal, inspection and title.”