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You’re looking to buy a home, but have you considered getting pre-approved first? This article will outline why pre-approvals are very helpful before you even start your search for a new home.
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.
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 a great candidate to purchase.
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 pre-approved 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.
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.
Don’t let that scare you! The more informed you become as a homebuyer, the more challenges you will avoid throughout the process.
Mortgage pre-approvals are considered a “hard” credit pull, which can affect your credit score. But the impact is usually very small, and generally, a preapproval will only take less than five points off your FICO score. Moreover, multiple pre-approvals within a 2-4 week period (i.e., when you get pre-approvals from more than one lender) will not ruin your credit score either since only one “hard pull” will be counted against your credit score.
Pre-approval letters are usually valid for anywhere from thirty to ninety days. That said, you should be able to get your pre-approval updated and extended, which can easily be done if the lender re-checks your information.
Getting pre-approved for a home mortgage will give you more negotiation power with sellers and help to streamline the entire process. The pre-approval letter serves as evidence that you have a lender that has reviewed your credit, as well as verified your income and assets. Ultimately, 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.
If you’re curious about mortgages and pre-approvals, Sammamish Mortgage can help. We are a local mortgage company based out of Bellevue, Washington, that serves the entire state, as well as Oregon, Idaho, and Colorado. Our mortgage financing professionals can work with you to help you determine which one of our mortgage programs is right for you. Call us today with any questions you have about home loans in the Pacific Northwest.
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