If you are planning to buy a home soon, you may have heard of mortgage pre-approvals. But what is a mortgage pre-approvaland why is it a smart decision before you start your search?
What does it mean to be pre-approved for a mortgage loan?
A mortgage pre-approval from your lender tells you exactly how much you can borrow and spend on a home. It will also describe the interest rate you will pay, although this may be different when you close the house.
To decide how much to lend you, your lender will look at your income, debt, and credit score. If your finances are healthy, you will be pre-approved for a larger loan.
Improve your credit score is essential because it will lead lenders to offer better mortgage conditions.
Why pre-approval is important
When you are pre-approved for a mortgage, your lender will give you a letter detailing the amount they will lend. They will also provide the best home loan for your needs. This is beneficial in several ways:
- It shows how much you can spend. Before you start looking for a house, it is essential to understand how much you can afford. If you don’t know how much you can afford to spend on a home, you’ll waste time looking for properties that are beyond your reach. You’ll get a list of must-haves, like location and number of bedrooms, but the cost might be more than those requirements.
- This makes your offer more attractive. In a seller’s market, when there are fewer homes and more buyers, there is more competition when buying. Anything a buyer can do to make their offer more attractive will increase their chances of buying the home. If the seller can see that you can borrow the money to finance the purchase, they may prioritize your offer over others.
- It helps negotiations. Since the seller can see that you are qualified to buy their home for the amount offered, they are more likely to be open to negotiations and concessions. This may mean you get more repairs and upgrades included, or the seller may cover some of your closing costs.
- It allows for faster closing. One of the big things that can delay closing is the mortgage approval process. If you have already gone through the pre-approval process, there will be less to do to approve the mortgage, and the closing process can happen faster.
How to get your mortgage pre-approved?
The first important step in getting pre-approved is choosing your lender. You can get pre-approval from a few different lenders to compare their terms and interest rates.
When you apply for pre-approval, the lender will need information from you. This will include:
- Identification. The lender will want proof of your identity and social security number. They will use these details to verify your financial history with a credit check. This will show the lender your debt-to-equity ratio and your likelihood of repaying the loan.
- Revenue. They will want proof of income for the past two years. This will require pay stubs, W-2 forms, tax information, and any other proof of income you have.
- Assets. Details of investments and financial donations should be provided. If you receive a gift to help with the down payment, a letter may be needed to show where the money came from.
To ensure that the pre-approval process goes as smoothly as possible, you must be prepared to provide these documents. When the lender has these documents, the underwriter can estimate how much you can borrow.
Pre-approval is only valid for a limited time. It could be 60-90 days and should give you plenty of time to find and make an offer on a home.
Your pre-approval should remain valid if you don’t make significant changes to your financial situation, such as taking out a new loan.
If your financial situation changes during this time, you may need to start a new pre-approval. And that could mean you’re not able to borrow as much as expected.
Even if you’re approved for more money than expected, you don’t have to spend it all on a house. If you spend less than the maximum amount available, your mortgage payments will be easier to manage and you will have less to worry about if your finances are to suffer in the future.
Bill Gasset is a nationally recognized real estate leader helping people buy and sell real estate in the Massachusetts metro area for 35 years.