If you are serious these days about buying a house, or even if you’re just looking at homes, there is one thing you’d better get — a mortgage pre-approval. 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 pre-approval involves the same steps as a mortgage application — you’ll provide detailed information about your income and assets that will be reviewed by the mortgage lender’s underwriters.
If pre-approved, you’ll get a conditional commitment by the lender for a specific loan amount. This conditional commitment is called a mortgage pre-approval letter and it indicates to sellers that you’re a serious buyer.
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 what your home shopping price range is. Knowing how much house you can afford means you can be more targeted in your house hunting.
Remember not to actually buy a house for the top level of your affordability. You need cash reserves for many things once you buy a house including 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.
How can you pick the right lender for your pre-approval?
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 for the pre-approval process are the same documents that you would need for a mortgage loan application. Bogan says the financial information 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 bank account documents
- anything to do with your 401ks
You will need to provide an explanation and documentation of funds that were deposited that aren’t associated with your pay stubs. The lender will also need to run a credit check.
Also, before ever talking with a loan officer, 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 homebuyer 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.”
Even if yours is a complicated case — for example, if you’re self-employed — you should have a response within 3 days.
If it is taking longer then 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.
You can help the pre-approval process go quickly by having your documents prepared and being responsive to any questions from your lender.
Do you need to use the lender who issued your pre-approval?
“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.
Often, once borrowers start the preapproval process with a lender, they often use the same one for their home loan.
But it’s a competitive industry and you’re not locked in. If you find better mortgage options with another lender — for example, a better mortgage rate or better loan terms — then it’s worth considering making the switch.
Pre-approval is the first step in the home buying process
Ready to buy your dream home? Getting preapproved by a mortgage lender is the first step towards buying the new home of your dreams.