Cheryl Fleming, GRI, ABR's Blog
A mortgage pre-approval can be a valuable tool for understanding how much you can afford to spend on purchasing a home. It can also make you seem much more attractive to sellers and help to identify any potential problems that may make it difficult to get a loan. In fact, many lenders claim that if a buyer isn’t pre-approved for a mortgage, they will have a difficult time navigating the real estate market. But what does pre-approval really mean?
What is a Mortgage Pre-Approval?
While it can sound like you’ve got a sure thing locked in when you’re pre-approved for a mortgage, being pre-approved doesn’t promise that you’ll be able to secure a loan for the home that you want to purchase. A mortgage pre-approval simply means that a loan officer has reviewed your finances and decided how much money you're allocated to borrow, what you should be able to pay each month towards your mortgage and what your interest rate will be.
Once, you’ve been pre-approved by a lender, you will get a letter that can be shown to sellers. This letter indicates that you’ve already established a working relationship with a lender. This helps to give sellers peace of mind in knowing that you’re serious about putting in an offer on their home, and they don’t have to risk wasting time with a buyer who isn’t serious.
What Are the Benefits of Getting a Pre-Approval?
A pre-approval doesn’t guarantee you’ll get a mortgage but it does offer a few key advantages during your search for the ideal home. It helps to give you confidence while looking at potential properties, as you look at homes that are within your budget. There’s no need to fall in love with a home that you can’t afford. Additionally, it establishes credibility as a buyer, showing that you have your finances under control and can help to put you on the fast-track to closing once you’ve found the perfect home.
Are Pre-Approval & Pre-Qualified the Same Thing?
Unfortunately, no. These two similar real estate terms are not interchangeable. When you are pre-qualified for a mortgage, this indicates that you have given your lender information regarding your income, debts and assets. Without doing further research, the lender then tells you that you should qualify for a certain mortgage. Pre-approval is a much more in-depth process, requiring your lender to verify the financial information provided by pulling your credit history, as well as verifying your income and assets.
If you plan to pursue a home in the near future, there is no need to wait to get a mortgage. Because if you enter the housing market with a mortgage in hand, you'll know exactly how much you can spend to acquire your dream house. As a result, you'll be able to map out your home search based on your property buying budget.
There are many things you can do to ensure you can get a great mortgage prior to launching a house search. These include:
1. Learn About Your Mortgage Options
Banks and credit unions offers a wide range of mortgage options. If you meet with these financial institutions, you can learn about all of the mortgage options at your disposal.
As you assess your mortgage options, it is crucial to weigh the pros and cons of each option. That way, you can make an informed decision about a mortgage and decide which option will serve you well in the years to come.
2. Ask Mortgage Questions
If you are uncertain about what differentiates one mortgage option from another, it is important to remember you are not alone. Fortunately, you can ask mortgage questions to home financing professionals to determine which mortgage option is right for you.
Banks and credit unions employ friendly, knowledgeable home financing specialists who are ready to respond to your mortgage queries. Thus, if you discuss your mortgage concerns with home financing specialists, you can get the guidance you need to choose the best mortgage based on your individual needs.
3. Improve Your Credit Score
Your credit score may have far-flung effects on your ability to get pre-approved for a mortgage. However, if you analyze your credit score, you can determine if you need to take steps to improve this score before you apply for a mortgage.
You are entitled to a free copy of your credit report annually from each of the three credit reporting agencies (Equifax, Experian and TransUnion). Take advantage of this complimentary perk, and you can analyze your credit score at your convenience.
If you have outstanding debt on your credit report, you may want to pay this off as soon as possible. Remember, the sooner you pay off outstanding debt, the sooner you can bolster your credit score.
In addition, if you identify any errors on your credit report, notify the agency that provided the report immediately. This will allow you to correct any credit report mistakes before you submit a mortgage application.
As you get set to apply for a mortgage and conduct a home search, you may want to hire a real estate agent too. A real estate agent can provide expert guidance as you pursue your dream residence. He or she will help you find a house that matches your budget, attend home showings and much more.
Ready to launch a comprehensive home search? Get pre-approved for a mortgage, and you can take the first step to establish a budget for the homebuying journey.
Of course, you want to stay within your budget when buying a house. You certainly want value for your dollar. But a buyer should never lose sight of the fact what they truly desire is getting the home they want and that fits their needs. To that end, potential buyers may put in a “low-ball” offer on a house they truly want. They may risk losing a home that meets all of their qualifications by placing an offer that is five or ten thousand dollars less than a price the seller is willing to accept. What can be even more frustrating is that even if a buyer's offer is accepted by a seller, the buyer may just waste that money, or more, on the mortgage they acquire.
Buyers may be surprised to learn how much even a half of one-percent difference in a mortgage rate can make.
In our first example, after a down payment, a buyer gets a mortgage for $250,000 over 30 years at 4.5% interest. The monthly payment would be about $1,267 monthly. Over the course of 30 years, those payments would total $456,120. The net cost of the loan is $206,120.
In our second example, we take that same $250,000 mortgage over 30 years, but the buyer compared mortgage rates and was able to find a lender offering that same loan at 4.0% interest, one-half of one-percent less. The monthly payment would now be $1,194, totaling $429,840. The net cost of this loan is $179,840. The difference between the two loans is $26,280. All because of a .5% interest rate difference.
The Best Way to Save Money on a Home
Rather than chancing to lose a home you really like by making an offer that is too low, consider instead performing due diligence on mortgage rates. Seeking out a lower rate can be critical in saving you five, ten or twenty thousand dollars or more. That's a far better solution than losing a home you really wanted.
There are a lot of factors that go into determining loan rates for mortgages. These include the buyer's credit rating, work history, income to debt ratio and loan to value ratio. The bottom line is the better your credit the more options you will have in securing a mortgage loan.
One of the best ways to save money on buying a home is saving money on your mortgage rates. The best way to do that is by monitoring your credit rating and working to build it. When it comes time to buy a home, get pre-qualified and compare mortgage rates. You can even use an online calculator to compare rates on your own. Need further assistance in determining how to find the right mortgage for you? Feel free to reach out, and we can embark on your mortgage and home journey together.
For many individuals, the homebuying journey often begins with getting pre-approved for a mortgage. Because if a buyer has a mortgage, he or she can enter the real estate market with a budget in hand.
Ultimately, there are many signs that now may be the perfect time to apply for a mortgage, and these include:
1. You're ready to upgrade from an apartment to a home.
If you're tired of paying monthly rent for an apartment, purchasing a house offers a viable alternative. And if you get pre-approved for a mortgage, you can move one step closer to moving from an apartment to a house.
In most instances, a home offers a significant upgrade over an apartment. Many residences are available in cities and towns nationwide that offer more space than apartments. Plus, as a homeowner, you won't have to worry about dealing with a landlord.
2. You feel good about your credit score.
If you have a strong credit score, you likely are a great candidate for a mortgage. In fact, you may be better equipped than others to get a favorable interest rate on the mortgage of your choice.
Understanding your credit score is a key part of the homebuying journey. You can request a free copy of your credit report annually from each of the three credit reporting bureaus (Equifax, Experian and TransUnion). Then, once you find out your credit score, you can determine whether you are in good shape to pursue a mortgage.
3. A buyer's market is in place.
In a buyer's market, there usually is an abundance of top-notch houses and a shortage of buyers. This means a homebuyer may be able to get a wonderful deal on a house, especially if he or she performs a comprehensive house search.
To find out whether a buyer's market is in place, you should check out the prices of recently sold houses in your area. Also, you may want to find out how long recently sold houses were listed before they sold. By reviewing this housing market data, you can differentiate a buyer's market from a seller's market and decide whether now is the right time to apply for a mortgage.
If you're interested in getting a mortgage and starting a house search, you may want to hire a real estate agent too. Because if you have a real estate agent at your side, you can receive extensive support at each stage of the property buying journey.
A real estate agent will teach you everything you need to know about pursuing a house. He or she will offer insights into the local housing market and ensure that you can conduct a successful house search. And if you ever have concerns or questions along the way, a real estate agent is ready to respond to them.
Want to launch a home search? Get pre-approved for a mortgage, and you can take the first step to acquire your ideal residence.
Many first-time home buyers are worried about all of the documents and information they’ll have to gather when applying for a mortgage. If you’re anything like me, you’re probably dreading having to dig through the five places that these documents might be. Fortunately, the process is now somewhat streamlined thanks to lenders being able to collect most of your information digitally.
In today’s article, we’ll talk about the documents you’ll need to collect when you apply for a home loan so that you feel prepared and confident reaching out to lenders.
Documents needed to pre-qualify
Before going into applying for a mortgage, let’s talk about pre-qualification. There are three types, or in some cases steps, of approval with most mortgage lenders: pre-qualification, pre-approval, and approval.
Pre-qualification is one of the earliest and simplest steps to getting pre-approved. It gives you a snapshot of the types and amount of loans you can receive. Pre-qualification typically doesn’t include a detailed credit analysis, nor do you need to provide many specific details or documents.
Typically, you’ll fill out a questionnaire describing your debts, income, and assets, and they will give you an estimate of the loan you might qualify for. Might is the key word here. Your pre-qualification amount is not guaranteed as you haven’t yet provided official proof of your information.
Documents needed for pre-approval
Getting pre-approved for a mortgage entails significantly more work on the part of you and your lender than pre-qualification. First, the lender will run a credit analysis. You won’t need to provide them with any information for this step, as they’ll be able to automatically receive the report from the major credit reporting bureaus. However, it’s a good idea to check your report before applying to make sure there aren’t any errors that could damage your credit.
Now is where the legwork comes in.
You’ll need to gather the following documents to get officially pre-approved or approved for a mortgage:
W-2 forms from the previous two years. If you are self-employed, you’ll still need to provide income verification, usually as a Form 1040, or “Individual income tax return.”
Two forms of identification. A driver’s license, passport, and social security card are three commonly accepted forms of identification.
Pay stubs or detailed income information for the past two or three months. This ensures lenders that you are currently financially stable.
Federal and State income tax returns from the past two years. If you file your taxes online, you can often download a PDF version that includes your W-2 or 1040 forms, making the process of submitting tax and income verification much easier.
Personal contact information. Name, address, phone number, email address, and any former addresses which you’ve lived in the past two years.
Bank statements from the previous two months. Also, if you have any assets, such as a 401K, stocks, or mutual fund, you’ll be asked to include those as well.
A complete list of your debts. Though these will likely be on your credit report, lenders want to ensure they have the full picture when it comes to how much you owe other creditors and lenders.