If you’re beginning the homebuying process, you’ve probably heard the words “pre-qualified” or “pre-approved” thrown around in relation to getting a mortgage loan.
Pre-approval for a mortgage is an essential first step in purchasing a home. It allows you to understand what funding is available to you and proves to sellers you are serious about an offer.
We’ll dig into what mortgage pre-approval is, why it’s valuable, and how it differs from pre-qualification.
What is a mortgage pre-approval?
During the mortgage pre-approval process, a loan officer determines which loans you could get, what your interest rate could be, and how much money you can borrow.
The loan officer makes these determinations through careful examination of your income, credit, assets, debts, employment, and more.
Taking this step helps you make stronger purchase offers, because you understand more completely what you can afford — and you can prove this to the seller, too.
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How do pre-approval and pre-qualification differ?
Pre-qualification is less accurate and official than pre-approval. You'll need to provide some financial information, but the loan officer isn’t digging into your finances deeply or pulling your credit history.
Instead, pre-qualification helps give you an idea of what type of mortgage you could get and what you can afford. It’s more of a rough estimate, while pre-approval requires you to prove your financial situation more thoroughly.
How does pre-approval compare to approval?
While you’re searching for a home, a pre-approval helps you shop more accurately and show the seller that you’ve taken the necessary steps to purchase a home.
Once you actually find your home, you'll need to submit a formal application. They'll review your finances as well as the condition of the home you want to purchase. Then, you can move on to full approval for a mortgage to purchase a home.
How to get pre-approved for a mortgage
To start pre-approval, you first need to find a trusted, reputable mortgage loan officer. This professional will be with you from start to finish during the home buying process, so choose carefully.
To start pre-approval, show your loan officer the following types of documentation:
- Credit history
- Employment verification
- Proof of income, including recent pay stubs
- W-2 forms from the past two years
- Past two years of federal income tax returns
- Bank statements to prove you can pay the down payment and closing costs
- Statements for asset accounts
If you meet all the requirements and can get pre-approved, you will receive a pre-approval letter. This letter can be shown to sellers to prove that you are a serious and qualified buyer.
However, this letter does typically expire after 60-90 days. Your credit history, income, or mortgage interest rate could change while you search for a home, which would change the loan type or amount you originally qualified for.
To get a new letter, you’ll just have to work with your loan officer to update your information.
What happens after you apply for pre-approval?
Within three business days, a loan officer is required to provide you with a loan estimate. This estimate will detail your pre-approval, outlining the loan amount, type of loan, terms, interest rate, and closing costs.
If you are denied a mortgage loan or pre-approved with conditions, you will be provided with an explanation. The lender will guide you to your next steps to improve your situation.
Why pre-approval is a valuable step in the homebuying process
There are numerous benefits to mortgage pre-approval. Meeting with a loan officer to discuss your loan options and budgeting can help you prepare for purchasing a home.
Understand your financial picture
The loan officer can pinpoint any problems, such as high debt or a low credit score.
In pinpointing these issues, you can begin to improve your finances for the best possible loan.
Homebuyers also will discover the maximum amount of money they can borrow, which will help you narrow down your search for the perfect home in your price range.
Establish credibility and fast track closing
To the seller, your pre-approval letter shows you have your finances in order and are serious about purchasing the home. This saves them the trouble of going through the process with you only to discover you can’t afford the home or were denied a mortgage.
Pre-approval also saves everyone time, because you already have provided all of your financial information to a loan officer. Once you make an offer, the rest of the process will go much faster because all of your information is already in the system.
If you’re ready to connect with a loan officer and get pre-approved for a mortgage, get a rate quote from the professionals at River City Mortgage.You also can call us today to ask questions about the process and learn more about how we can get you pre-approved. Our team can’t wait to help you finance your home purchase.