Home Buyer’s Guide Part 3

How to Get a Mortgage Pre-Approval

The difference between pre-qualification and pre-approval
Before you start looking for a home, it’s important to get an accurate picture of how much you can afford.

Mortgage Pre-Approval

This will prevent you from wasting your own time and your real estate agent’s time looking at houses outside your budget, and can prevent the heartbreak of finding the perfect home but then realizing you just can’t afford it. There are two ways to get an idea of your budget, by getting either a pre-qualification or a pre-approval.

With a pre-qualification, you’ll answer some questions from your lender about your debts, income, and assets, and they will pull your credit report. Pre-qualification is a more general, less detailed approach. Some lenders will give you a pre-qualification letter, telling you roughly how much you could possibly borrow.

A pre-approval is similar to a pre-qualification, but is more detailed and thorough. You’ll provide your financial records and the lender will pull your credit report, but you will also fill out a mortgage application, and the lender will verify your information in a process called underwriting. When your pre-approval is finished, the lender will give you a pre-approval letter detailing how much you’ll be able to be approved for.

How long is a pre-approval letter good for?

Pre-approval letters are generally good for 90 days, though this may vary for certain loan types. If it’s been more than 90 days since you received your pre-approval letter, you should get a renewal from your lender before making an offer on a home.

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Why pre-approval is a better choice

  • A pre-approval is a more accurate and detailed representation of how much you’ll be able to borrow. It’ll give you a more reliable idea of what you can actually afford when home shopping.
  • A pre-approval lets your real estate agent know that you are a serious buyer, and that you can afford the homes you are looking at.
  • A pre-approval letter gives the seller more confidence in your offer, showing you can actually afford the offer price. In a competitive buying market, this can make a big difference.

Many lenders don’t bother with pre-qualifications, because pre-approvals are a more detailed and accurate way of gauging what a borrower can afford. Whether your lender gives you a pre-qualification, pre-approval, or both, your loan is still subject to formal underwriting review once your offer is accepted by a seller.

How the lender determines your pre-approval amount
Lenders are concerned with three primary criteria when calculating your pre-approval: income, savings, and credit.

  • Income
    Your lender will look at your income to verify what monthly payment you can afford. They will also review your debt-to-income ratio, to see what amount of your income is offset by pre existing debt obligations.
  • Savings
    Your lender needs to know how much you have saved, to gauge how much of a down payment you can afford. In the past lenders typically expected a down payment of 20%, but recently that number has come down. FHA loans require a down payment as low as 3.5%, while many conventional loans require at least 5%.
  • Credit
    Many lenders will require a minimum credit score to approve a loan, and a better credit score will often mean you can qualify for a lower interest rate. A high credit score shows lenders that you are a lower risk borrower, while low credit scores indicate lending to you is a riskier investment.
  • Will getting a pre-approval hurt my credit?
    When a lender processes your pre-approval, they will pull your credit report, which may knock your credit score down a few points. This small drop is temporary, and if multiple lenders pull your credit report in quick succession the credit bureaus treat these as a single inquiry, meaning your score will only drop once.

How to choose the best mortgage company
Deciding on a mortgage company is a vitally important part of the home buying process, and will continue to have an impact long after you’ve closed on your home. A low interst rate is often the primary concern when looking for a lender, but shopping simply for the lowest rates, without considering other factors, is generally not the best idea.

When looking at various lenders, ask the following questions:

What rates do you offer, and what are your fees?
How long on average does it take to close a purchase home loan?
Do you have a client satisfaction rating, and what is it?
Will you continue to service my loan after closing, or will it be sold to another company?
Will you continue to service my loan after closing, or will it be sold to another company?
Will you be readily available if I have questions or need to contact you?
two people discussing finances
person signing a document

Why choose us?

Our coordinated team can get your loan processed faster than the competition – guaranteed.

Our personable and extremely knowledgeable loan officers will walk you through your first home buying experience so smoothly, your worries will be left behind.

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