A pre-qualification is a lender’s general statement that they will provide financing if certain conditions are met. You will discuss your financial situation with the lender, and they may or may not check your credit. Usually you can get pre-qualified via phone, and the loan officer will rely on the information you provide. More and more professionals in the real estate industry believe that a pre-qualification is not even worth the paper it’s written on. What is a pre-qualification good for? Well, it gives you a look into what you might be able to afford and it’s a first step on the home buying journey. I strongly recommend that clients get their pre-approval done right after they receive a pre-qualification (be prepared for everyone to call it a “prequal”).
A pre-approval is a more extensive process where you will have to provide your financial documents and give the lender a much more detailed look into your financial situation. Once you receive a pre-approval from a lender, your chances of a successful closing on your new home are greatly improved. Keep in mind that there “lending commandments” that should not be broken. Big purchases or financial changes during your contract period can prevent you from closing on that dream home.
Related Reading: Home Buyers Frequently Asked Questions
What will you use the home for?
This might seem an odd question, but how you plan to use the home will determine the kind of loan, interest rates, and conditions of your loan. Will your new home be your primary residence, second or vacation home, or an investment property? I always recommend legal or tax counsel for your investment plans, but especially when you plan to use the newly acquired home for anything but your primary residence. You should really be aware of any tax rules and regulations and how these will impact you.
Getting pre-approved makes you a more powerful home buyer
- Your mortgage pre-approval will give the seller greater assurance that you can close on the property that they want to sell. THAT’s powerful and that’s what you need in order to get your offer accepted.
- A pre-approval will give you a better understanding of how much you can borrow and it will educate you about the mortgage process.
- The pre-approval process will identify any credit issues that you’ll have to take care of or any other obstacles that might be in the way of you floating through the mortgage process.
- Any good lender will be able to lay out all mortgage options to you and interest rates that go with your mortgage type.
- An informed buyer is a powerful buyer even if you didn’t win a multiple offer situation (the first time).
Tips for Choosing a Lender
What will the lender look at during the pre-approval process?
- All income (salary, benefits, other income).
- All debts and expenses.
- Your employment history.
- How much cash you have available. This will usually also determine what type of loan you will be able to choose.
- All investments.
- Your credit history (of course).
- Current interest rates.
Related Reading: Tips for Choosing a Loan
- Shop for lenders. The good rule of thumb is to get at least 3 offers and then chose the lender that fits your criteria.
- Keep your pre-approval current. A pre-approval from 6 months ago doesn’t mean you are pre-approved today. Maybe you would qualify for more? Maybe you’d qualify for a lower interest rate? In other words, stay in communication with your lender and keep track of when you may need to consider getting pre-approved again.
- Ask for your credit score – it’s good to know.
- Don’t pay ahead for anything (not even application or appraisal fees) even if you are told it will all be credited back to you at closing. This is the lender’s strategy to tie you to THEM and will most likely keep you from shopping other brokers, banks, or offices.
Related Reading: 10 Ways to Lower Your Mortgage Payment
Does a pre-approval guarantee I can buy a home?
No. A lot can happen between receiving pre-approval and closing on a house. A pre-approval is simply a temporary and preliminary lender stamp of approval. Consider it a “I think we can lend to you.” The pre-approval is written up by a loan officer and NOT by an underwriter who has the last word in your journey to the home mortgage and finally the home purchase. In other words, a pre-approval is NOT a promise that your loan WILL be approved.
Once you have submitted an offer on a home, the process of assessing your ability to repay the loan and the assessment of the property as an investment for the lender begins.
Related Reading: Home Buying: Due Diligence
What documents will I need for pre-approval?
You will receive a detailed list of loan costs in a Loan Estimate. You’ll need to officially apply for the loan in n order to receive this detailed information. According to the TILA-RESPA Integrated Disclosures (TRID), submitting these 6 pieces of information constitutes a loan application:
- Social Security Number
- Property Address
- Estimated Value of Property
- Mortgage Loan Amount sought
Once the lender has some basic information as mentioned above they will want documentation. It is best to collect this paperwork ahead of time. That will reduce stress and increase the speed with which you will receive a pre-approval:
- Thirty days of pay stubs.
- Two years of federal tax returns.
- Sixty days or a quarterly statement of all asset accounts including your checking, savings and any investment accounts.
- Two years of W2s.
- Proof of assets/income.
- Proof of debts/expenses.
- Proof of employment.
- You’ll need to provide a gift letter if someone is gifting your down payment or any part of it of your home purchase.
Different lenders might have additional requirements.
Related Reading: Steps to Buy a House
Important questions to ask when choosing a mortgage
Of course, you’ll want to know what your interest rate and your APR will be (this is a calculated interest rate also including closing/lending cost like points, broker fees and other charges). It’s quite interesting to see that some lenders offer a low interest rate but then nickel and dime you to death with fees.
You should definitely be aware of your monthly mortgage payments. Many times hazard insurance (also called home owners or property insurance) as well as taxes are included in your monthly mortgage payment. When you see a monthly amount PITI, it means that Principal (your loan amount), Interest, Taxes and Insurance is all rolled into one monthly payment.
Tip: If you are currently living below a newly estimated PITI payment, you might want to practice living with the new mortgage payment. In this case getting a pre-qual and a “mortgage – scenario” from your lender would be very helpful. Once you have an estimated PITI amount, pay your rent or current mortgage as you usually do, then set the additional amount to match the estimated mortgage payment aside. See how it feels to you. Ideally, you’d want to do this for about 3 months. Once you are house hunting you won’t have time for that so add this little exercise into your pre-house hunting and investigating process.
- Does my loan have a prepayment penalty?
- Is my loan assumable?
- How long is my interest lock? (30 days, 45 days, 60 days etc.)
- Will I be able to remove mortgage insurance? When? How does it work?
Learn, Learn, Learn
There is a lot to learn when it comes to the mortgage process. I like Dave Ramsey’s words: “Find a lender [service provider] with the heart of a teacher.” You’ll want a good deal, but you also want to understand what you are signing. The pre-approval will get you started on the road of loan terminology and of obtaining a loan.
You will likely forget most of things mortgage professionals are telling you because it’s a lot of information. However, if you have a lender taking the time to explain details and patiently answer questions, chances are you’ll remember much more than you expect.
Have the loan officer explain what loan options you have, what costs there are, how much money you’ll have to bring to the table, etc.
I highly recommend taking a look at these additional posts for more information about mortgages:
Buyers and sellers prepare in this market – Pre Approval is one of the things on your buyer checklist