Before you start your home search, a real estate agent will recommend that you get pre-approved, or at least pre-qualified, for a home loan. This is particularly important if you’re a first-time buyer. Getting pre-approved isn’t just helpful for the agents and seller — it’s helpful for you.
A glimpse into your finances
Getting pre-qualified is an easy process that lets you know if you could qualify for a mortgage, how much you can borrow and the interest rate you’ll be offered. It doesn’t verify any of your information, which is why it’s not an official pre-approval. You’ll simply provide a lender with your income information, assets, and any debt you may have, and they can then get the ball rolling.
This quick check will give you a glimpse into areas that may need work such as raising your credit score or minimizing your debt. Once those items have been addressed, you’ll be on your way to getting pre-approved without any setbacks.
Pre-qualified versus pre-approved
A pre-qualification letter is better than no letter at all, but getting pre-approved is really the goal and will put you one step closer in the home-buying process.
Getting pre-approved is a more official procedure where the lender verifies your financial information. You’ll need to provide paperwork, including:
- Current pay stubs
- Proof of past employment
- Tax returns
- Proof of assets
- Bank statements
- Credit information
Keep in mind that if you have a low credit score and a lot of debt, getting approved could take several months, and your interest rate could be higher. For the quickest results and best rate, it’s a good idea to get your credit score up and debt under control before you start the loan approval process.
Since a person’s financial situation can change rapidly, a mortgage pre-approval letter is typically valid for 60 to 90 days.* You’ll want to get pre-approved at the start of your home search so your letter doesn’t expire by the time you’re ready to buy. Getting pre-approvals from two or three lenders can also be a good way to weigh your options. Then, you can compare interest rates and decide for yourself.
The right home for your budget
Once you know how much money you’re approved to borrow, you’ll have a better idea of your budget. Instead of falling in love with homes you can’t afford, your agent will send you listings that you’re qualified to buy. Use REIN.com (search link) to perform your preliminary searches. You can filter by price, by city, or even calculate your mortgage payments.
Even if a lender approves you for a certain amount, you’re the only one who truly knows what you can afford. There’s a chance the lender will approve you for more than you can realistically afford. A simple way to figure it out: Take your total monthly take-home pay, and multiply it by 25 percent. This number should ballpark how much of a mortgage you can afford each month. If the number seems low to you, keep in mind you’ll also need to pay property taxes, insurance and possibly Homeowners Association (HOA) fees on top of that number.
The seller and the seller’s real estate agent will want to know that you’re able to get a mortgage. If a seller has competing offers, having a pre-approval letter could help you stand out among the competition. It shows that you’re eager and serious about purchasing a home. By having your pre-approval ready to go, it speeds up the home-buying process, which is especially appealing if the homeowner is trying to sell quickly.
Peace of mind
When you make an offer on the home you want, wouldn’t it be nice to know that you’re likely to close on it? Getting pre-approved can help reassure you of this. Having your pre-approval letter does not guarantee that you’ll get the loan, but it is a very good sign that you will be approved. To keep your chances high, don’t make any drastic financial decisions, like opening up new credit cards or racking up new debt. Use your pre-approval as motivation. Continue paying your bills on time, and you’ll quickly be on your way to getting final approval on your loan and enjoying your new home.