When shopping for a new home, the seller will want to know that you’re serious about making a purchase and have the funds to make it happen if the home’s a good fit. That’s where the mortgage pre-approval comes in.
In a nutshell, it’s a document, or good faith estimate, from your prospective lender that states the loan amount you’ve been preapproved for so you can shop in confidence. In addition, loan specifics, including the interest rate, term, and any other important information details about the loan programs you qualify for, will be included in the letter.
You should also know that mortgage pre-approvals or only valid for a set timeframe, usually between 60 and 90 days. This you’ll have to move forward with an offer or start construction to even the pre-approval from lapsing and having to start from scratch.
The Case for Getting Pre-Approved
Maybe you’re in stellar financial shape and don’t foresee having any issued qualifying for a loan to fund the home of your dreams. Consequently, you don’t see the point of obtaining a mortgage pre-approval before starting your search.
While you may be correct, it doesn’t hurt to go ahead and get pre-approved, anyhow. Reasoning? As mentioned earlier, it gives sellers confidence that you can follow through on your promise should you make an offer on the home that they’re willing to entertain.
Furthermore, some realtors won’t work with sellers that don’t take the extra step to get pre-approved because they don’t want to waste their time with buyers who aren’t ready to make a purchase or who could have trouble securing financing later on down the line.
Getting pre-approved will also provide you with a more concrete range of affordability, along with how much you can expect to fork over in payments each month. And you may find that the home price you had in mind is far more than you can comfortably afford each month in payments.
Does a Pre-Approval Guarantee That You’ll Get Approved for a Loan?
Unfortunately, getting pre-approved for a mortgage doesn’t mean the lender is on the hook to follow through with what they propose. It’s just the first step of many in the process, and you still have to clear a series of red tape before the lender can give you a firm yes and close on the loan.
This could include manual underwriting, which means your application will have to undergo more scrutiny before moving on to prepare for closing. The lender may also decide to impose additional restrictions on your loan, especially if your financial situation undergoes in changes during the process, which could mean that you ultimately won’t qualify for financing.
Pre-Approval vs. Pre-Qualification
If you’ve already started researching lenders, chances are you’ve heard the terms “pre-approval” and “pre-qualification” used interchangeably. But they aren’t the same. In fact, one holds significantly more weight than the other.
When speaking with the lender, you can request that they pre-qualify you for a loan. All this entails is a general discussion and about your credit history and finances, including income, assets, and debts. The loan officer will also be interested in know what type of loan product you’re seeking (if you have any particular loan programs or types in mind), along with the amount you’re willing to put down at the time of purchase.
But since there’s no hard credit check or verification of documentation, the lender will not grant you an official offer off your word alone. However, a loan pre-approval is the next step in the process that requires a more in-depth look at your income and finances, along with a review of your credit profile, so the lender can better gauge what type of loan product you’re most likely to qualify for.
Which Lender Should You Use to Get Pre-Approved?
There are several lenders to choose from when seeking a mortgage pre-approval. But what matters most is that you get the best bang for your buck or the best terms that they have to offer for your financial situation. And for this reason, it’s worthwhile to shop around extensively and obtain pre-approvals from more than one lender.
Why so? Well, an interest rate reduction of as little one percent could save you thousands of dollars of the life of the mortgage. Furthermore, some lenders have more flexible loan options to choose from than others, which could come in handy if you have unique financial circumstances.
You also want to consider whether or not the lender goes the extra mile to earn your business. Are they available and willing to assist you with any questions you may have before starting the process? What incentives do they have to lower the cost of the loan for you? Are they using high-pressure tactics in an effort to convince you to do business with them? These are just a few key factors to keep in mind when exploring lenders because you’ll be doing business with them for years to come and want to strengthen your chances of having a seamless experience.
Even better, the FICO credit scoring model allows you to rate shop without dinging your credit score repeatedly. But if you don’t feel comfortable getting pre-approvals from multiple lenders, pre-qualifications are also a viable option to help you narrow down lenders and loan types.
The Mortgage Pre-Approval Process
Step 1: Check your credit profile and rating.
While this technically isn’t a part of the mortgage pre-approval process, it’s a crucial step you shouldn’t overlook. The lender will be interested in your employment situation as they need to ensure you have the means to pay. And they’ll also factor in any outstanding debts to determine if you’re currently overextended.
Your credit rating holds significant weight in the eyes of the lender as it gives them an idea of the risk you’ll pose to them as a borrower. The higher your credit score, the lower the interest rate you’ll qualify for assuming everything else checks out.
So, start by retrieving a free copy of your credit report from AnnualCreditReport.com. You’re entitled to one free copy from each of the credit bureaus – Equifax, Experian, and TransUnion – on an annual basis. Review the reports from top to bottom and take the necessary steps (or file disputes) to rectify any issues you notice.
With regards to your FICO score, it’s not available for free on AnnualCreditReport.com. But you may be able to retrieve it from your credit card statement or financial institution’s dashboard if it’s a feature they offer. Otherwise, you can visit sites like Credit Karma, Credit Sesame, or myBankrate to view your score for free. The figure you see will probably be different from what the lender uses, but you’ll get a good idea of where you stand.
Step 2: Make an appointment with the lender.
It may be tempting to simply pick up the phone or drop into the bank to obtain a pre-approval. But it’s best to set an appointment to confirm the loan officer is available to walk you through the process during a time that’s convenient for you. Plus, some banks only have mortgage officers on hand on select days of the week, so the day you call or drop in may be a day that they’re not available.
Step 3: Compile the necessary documentation.
During your appointment, the loan officer will run a credit check to determine what types of loan programs and rates you qualify for. They will also request documentation to substantiate the information you entered about your employment, income sources, and finances on the loan application. This includes, but may not be limited to:
- A copy of your driver’s license and Social Security Card
- Copies of your two most recent pay stubs
- Copies of your two most recent W-2s
- Copies of your two most recent federal tax returns
- Copies of your two most recent bank statements
Keep in mind that each lender has their own set of documentation criteria, so it’s best to reach out to confirm what you need prior to your appointment.
How Long Does It Take Get Pre-Approved?
Assuming you provide the lender with everything they need, you should receive a response within a few business days. But it could take much longer to hear back if you’ve had recent credit issues or financial hurdles that must be overcome before they can issue the official stamp of approval.
What to Do If Your Pre-Approval Application Is Denied
You have three choices:
- Keep applying until you find a lender that’s willing to work with you. This could mean you’ll have to settle for less favorable loan terms and a higher interest rate and possibly refinance at a later date. But if you’re crunched for time, you may not have any other alternatives.
- Return to the drawing board and patch up your credit and finances to become a more attractive borrower. The lender can provide you with more details on why you were denied. Request that they do so and draft up a plan of action to rectify the issues so you can strengthen your approval odds and qualify for the best rate they have to offer.
- Give up and try again at a later date. If you’re not pressed for time and have time on your hands before it’s a must that you get a home loan, you may decide it’s best to walk away for the time being.
The Bottom Line
If you’re serious about buying a new home in the near future, you may want to consider getting pre-approved for a home loan. That way, you’ll have a peace of mind knowing your finances and credit rating are in stellar enough shape to qualify for the funding you need. Most importantly, you won’t have to scramble later on down the line to find a loan product to fund your new home purchase.