Getting pre-approved by a lender before shopping for a home helps you in two ways. First, it helps you narrow down the homes under consideration as it tells you exactly what you can afford. Second, pre-approval shows you have the resources to make the purchase and it helps you act quickly when you find the perfect home. Pre-approval can give you an advantage over other buyers when you find a home as sellers are more likely to accept an offer from a buyer who’s already been pre-approved for financing. The logic here is two fold, first a buyer who’s already taken the time to secure a mortgage preapproval tends to be a more serious and committed buyer. In addition an offer from pre-approved buyer is more likely to result in a completed sale, while an offer from a buyer that has not been pre-approved is not such a sure thing. Sellers rarely wish to take the chance of losing the sale — and often times give preference to a pre-approved offer that is slightly lower as opposed to an offer for a bit more money not accompanied by a pre-approval letter and in short it can be a deciding factor for sellers who receive multiple offers.
Mortgage pre-approval involves the same steps as a mortgage application – you’ll provide detailed information about your income and assets that will be reviewed by the lender’s underwriters. If approved, you’ll get a commitment by the lender for a specific loan amount. (When you apply for a mortgage, you’re applying for credit to purchase a specific property as well.) You’re going to be borrowing a large sum of money and thus the lender is going to have a number of questions for you, you will also be required to show proof of income and submit your social security number, so the lender can review your credit. Pre-approval is not the same as prequalification; prequalification is an estimate of the amount of money you can borrow and it is not guaranteed.
Pre-approval is a good step to take before you start shopping because it shows sellers that you are a serious buyer. In fact, some sellers, won’t even review your offer unless you provide a pre-approval letter with the offer. That way, sellers can be certain the deal won’t fall through.
There are several factors involved in the pre-approval process of your mortgage application.
- Income. When you’re qualifying for a loan, lenders usually use your gross income (all the money you earn before taxes) to determine the monthly mortgage payment you can afford. Gross income may also include the average of overtime pay and commissions, and child support or alimony, if you wish to have them considered.
- Monthly mortgage payment as a percentage of your income. In general, lenders require that your total monthly mortgage payment ” principal, interest, property taxes, mortgage insurance, hazard insurance and any homeowner association dues ” be no more than 28% to 33% of your monthly gross income.
- Your total debt situation. You may have car loans, student loans, credit cards, child support, alimony or other monthly expenses. In general, lenders require that the total of all your monthly expenses (excluding basics like utilities and groceries) not exceed 38% of your gross monthly income.
- Credit history. A satisfactory record of paying your bills on time is an important part of getting a home loan. If you’ve had credit difficulties within the past two years, you’ll want to prepare a good explanation of any late or missing payments on your credit report as this will be taken into consideration.
- Employment history. Lenders usually prefer to lend money to people who have worked consistently in the same or related occupations. You will need to verify employment. If you’re self-employed, work on commission or have been at your job less than two years, you may need to provide additional information about your work history.
As your Realtor, we will assist you by referring you to lenders we work with on a regular basis, who have demonstrated professional excellence, as well as a commitment to providing financing on the most favorable terms available. Not only will these professionals save you money, but they will also take the time to explain the loan application process, the different types of loans available, and the pros and cons of each. They will work with you and ask that you consider how long you plan to be in your home, if you expect your income to rise, fall or stay the same in the coming 2-5 years, etc. After all of this has been discussed they will assist you in determining which product is right for you. Like us, the lenders we work with are industry leaders with many years of experience, who’s goal it is to serve you and your family and earn your business for life!
** TIP: One note on timing: Don’t apply for a pre-approval until you’re fairly certain you’ll want to buy a home within the next 90 days. Unlike getting prequalified, a pre-approval involves requesting a copy of your credit history and an examination of your application information and the documents you provide. A pre-approval will show as an inquiry on your credit report, and it’s only good for a certain amount of time.