One of the first and most important steps when buying a home is getting pre-approved.
In addition to the peace-of-mind it gives home buyers, pre-approval letters provide leverage when negotiating with home sellers.
But how sure a thing is a pre-approval? Can you be turned down even though you’ve been pre-approved? Is there a difference between getting pre-qualified and getting pre-approved?
What’s the Difference Between Pre-Qualified and Pre-Approved?
Getting pre-qualified is generally the initial step in the home buying process.
Pre-qualifications are usually a simple process involving a conversation with a mortgage lender, either over the phone, in person or electronically. Your lender will ask questions pertaining to your credit, income and downpayment.
Because it’s typically a procedure that’s short and sweet, your pre-qualification isn’t meant to be a sure thing. Instead, it just gives you an idea of the amount for which you can expect to be pre-approved.
Getting pre-approved, on the other hand, is a more extensive process.
Jackie Peck, a loan originator with United Community Bank in Marietta, GA says “getting pre-qualified is like running your symptoms through WebMD. Getting pre-approved is like seeing your doctor.”
In addition to pulling your credit, your lender will need to document a number of factors pertaining to your ability to purchase a home. Typically, lenders will pull your credit and validate your financial viability through income and asset documentation.
The biggest differences between these two processes boil down to this – pre-qualifications are usually just information provided via a verbal or online conversation, whereas pre-approvals involve supplying documentation.
How Reliable Is Your Pre-Approval Letter?
Pre-approval processes can vary from lender to lender.
Because of this, the strength of your pre-approval will depend largely on your lender. This is why you’ll want to shop around to find the right lender for you.
Some lenders will stamp their name on a pre-approval letter without the thoroughness that another would use.
As the consumer, and someone who doesn’t know the business, how do you know whether or not you have a rock-solid pre-approval? Generally, you’ll know you have a professional in your corner if they put you through the ringer to get pre-approved.
A good lender will ask you a ton of questions and request documentation to support the information you’ve provided.
The more personal the questions get, the more accurate your pre-approval is going to be. This can improve your chances of being able to purchase a home.
It’s important to bear in mind that getting pre-approved doesn’t guarantee you’ll get a loan. You will still have to go through the full underwriting process.
Getting fully approved occurs after you’ve found your home, gone under contract, submitted your loan application paperwork, had an appraisal completed, and received final underwriting approval and clear to close (CTC).
But the pre-approval is critical for you to begin your home search in a serious way.
How Long Does It Take to Get Pre-Approved?
A strong pre-approval will typically take some time. Most lenders will need at least a few hours, and possibly even a day or two, to review your figures and prepare your pre-approval letter.
This is even truer when you have any of the following:
- A recent major derogatory event on your credit such as a foreclosure, short sale or bankruptcy
- Judgements, collections or charge-offs reporting on your credit
- Large monthly debt obligations such as car loans, student loans, credit cards, etc.
- Income derived from being self-employed or an independent contractor
- Significant fluctuations in income
- Low credit scores
- Investment property scenarios
Often, the amount of time it takes to complete your pre-approval is determined by how quickly you can provide the necessary documentation required, so it pays to be prepared.
For How Long Are Pre-Approvals Good?
Pre-approval letters are time-sensitive and expire after a certain amount of time. Generally, pre-approval letters are valid for 60-90 days.
Fortunately, getting an expired pre-approval updated takes less time and effort than getting a brand-new pre-approval. Typically, the lender may just need to update a few documents such as paystubs and bank statements.
How You Can Avoid Pre-Approval Missteps
Since things can change from the time it takes to get pre-approved to buying a house, it should be noted that pre-approvals are never 100% guaranteed.
A common mistake made by pre-approved prospective homeowners is closing credit accounts. It can be tempting and seem to make sense to close your credit card account, especially after you’ve paid it off.
However, closing credit accounts can actually have a negative impact on your credit scores.
This logic is also relevant to auto loans. Many people think it’s a great idea to throw a big chunk of money towards paying off their automobile.
However, sometimes paying off a major credit line such as an automobile can have an adverse effect on your credit.
The opposite is true as well. You don’t want to go out and take on any new debt. Wait to buy furniture for that new home!
Taking on additional debt means a change to your debt ratio. This change could have serious consequences to your pre-approval.
A better job with a pay increase may seem like a no-brainer. However, since this will be different from what your lender used when getting you pre-approved, you should always seek your lender’s advice before making any employment changes.
Final Words on Pre-Approval Letters
The best thing you can do after you’ve been pre-approved is to try and keep everything the same.
You should refrain from doing anything that may affect your credit, your assets, your debt ratios, your income or employment. It’s also best not to change bank accounts, tap into your savings or retirement funds or move money around.
If you find yourself in a position that warrants changing any of these areas, contact your lender immediately to insure your pre-approval letter is still intact.