Your credit is good, and you have a down payment saved to purchase your dream home. All you need is a pre-approval letter before shopping! Read on to discover the answers to the most frequently asked questions about mortgage preapprovals.
- What is a Mortgage Pre-Approval?
- How do I get a Pre-Approval Letter?
- Can my loan be denied after Pre-Approval?
1. What Is A Mortgage Pre-Approval?
In simple terms, a pre-approval is a letter saying that you are a good candidate for a mortgage loan. It is a document, prepared by a licensed loan officer, stating that a buyer has been initially vetted as to income and credit history, and is most likely able to purchase a home under a specific price, with a specific interest rate.
The letter will include other important information, such as the type of loans that you qualify for and the amount of down payment required. They are generally valid for 60 to 90 days.
Every experienced realtor will advise that you must obtain this pre-approval document prior to looking for your next home. It is essential to know your approval amount, so that you can narrow down which houses you choose to visit. In addition, most sellers will not even consider an offer to purchase unless you have a preapproval letter.
The preapproval does not mean that you are actually guaranteed a loan. But it does mean that you are more likely than not a great candidate to purchase.
2. How do I get a preapproval letter?
First of all, you must have a decent credit score and a stable income.
Next, you will want to contact several lenders and find out if they have the interest rates and loan programs that are best for you. Start off with an interest rate comparison. You should be able to get quotes from each company, using only your basic financial information. Prospective lenders should not need to pull a full hard credit report to provide you with a rate quote but will need to pull your credit for pre-approval.
Generally, this is a free service provided by most lenders. Be wary of online lenders offering a preapproval letter within minutes as these are not full pre-approvals with full verification of income, assets and credit. Most sellers/Realtors will reject these letters in a competitive housing market. If you are making an offer on a competitive home these letters will be viewed almost like having no letter at all.
Once you are ready to get pre-approved you will need to complete a loan application. Many applications can be done online or over the phone. The loan application is a personal statement of your current financial situation. It includes items such as marital status, social security number, income and expenses, job history, alimony & child support (generally does not show up on your credit report) and proposed down payment sources. General verification documents needed will include 2 years’ tax returns, W2s, recent pay stubs, recent bank statements, and a copy of your driver’s license. You may be asked to provide additional documents, such as investment account statements.
Assuming the initial review is successful, the lender will produce your pre-approval letter, and you are ready to go shopping! As you narrow down your home search you need to consider property tax payments and homeowners insurance and the impact they will have on your monthly payment and possibly your pre-approval. HOA dues can also have a big impact on your qualification and monthly payment so discussing the property type you are shopping for with your Loan Officer is a must. Certain geographical areas have higher property taxes than others, and this cost may push you over your approved payment amount.
Once you are preapproved and have signed a contract to purchase, you need to start the actual loan process. This includes finalizing which loan program you want to go with, setting the down payment, getting an updated rate quote and deciding whether you want to lock or not. The loan disclosures will also be sent at this time which includes an official Loan Estimate.
3. Can my loan be denied after I am Pre-Approved?
As mentioned above, the preapproval should include verification of your credit, income and assets. Your personal information and loan application will still need to be formally verified, and this can take some time (usually 30 days). Assuming your lender did a full and thorough preapproval and assuming nothing has changed with your financial situation it is rare that a preapproved loan will not qualify once the actual loan process starts. With that said you need to be aware that during this time lag, several things may occur that impact your ability to buy your home.
- Interest Rate Changes – a pre-approval is calculated based on current interest rates. When rates increase, your borrowing power may decrease. Once you officially submit your contract to purchase, you will be able to lock in an interest rate.
- Appraisal Requirements – to secure your loan, the home must reflect an official value that is at least the amount of your offer to purchase on the sales contract. Lenders work with neutral, licensed appraisal companies to perform a basic inspection of the home and compare values of similar homes on the market in your area. If an appraiser encounters material defects with the property, they may require the seller to remedy the problems. If an appraisal amount is lower than the sales price, the seller will be asked to reduce the price of the home. The seller is not legally obligated to do either which could kill the deal.
- Changes to Your Credit or Debt – Your lender should advise you to continue with your financial status quo. Do not open any new credit cards, do not miss any payments, and do not make large purchases after your preapproval. Once you submit your loan application, and your lender pulls an official credit report, you may discover unknown issues that will need to be remedied. Further, your credit report will be checked again just prior to your closing date. Any new debts or adverse changes in the report could cause a denial of your loan at the last minute.
- Changes In Jobs – your preapproval was generated based on your stable employment history. If you get fired, demoted, or lose overtime pay, your loan will most likely be denied. Your lender will send an official document or “Verification of Employment” to your boss at the initial stages of the official loan approval process. Some lenders do a secondary verification a day or two prior you your closing date.
- Reduction of Assets – your assets are considered as part of your creditworthiness in your preapproval. Remember, emergencies happen. Avoid draining your savings or withdrawing money from any investment accounts prior to closing on your loan.
- Unforeseen Insurance Requirements– the physical condition of your new home must be deemed insurable by a licensed homeowner’s insurance company. Lenders require a “certificate of insurance,” or letter from that company indicating that they will provide homeowner’s insurance on your property. If the property is uninsurable, then the loan will be denied. If the cost to insure is unusually high, (for example if costly flood insurance is required) and pushes the total loan payment out of the approved amount, the loan may be denied.
Don’t let that scare you! The more informed you become as a homebuyer, the more challenges you will avoid throughout the process.
Getting pre-approved for a home mortgage will give you more negotiation power with sellers and help to streamline the entire process. However, in today’s real estate market a pre-approval letter is a necessary first step if you want to be taken seriously as a buyer. Most sellers will not accept purchase offers unless a pre-approval letter is included and Realtors will not take you shopping without one.
Taking the advice above and getting your finances organized will set you up for a pre-approval letter and a clear road towards your final goal of home ownership.