Buying a new home is exciting. Taking the time to get pre-approved before you start your search can help strengthen your position when you want to make an offer. Here are six things to know about getting pre-approved and how it can help you on your homebuying journey.
1. What is a pre-approval?
A pre-approval is a letter from your lender that shows the type of mortgage and amount of money you qualify for. You can provide the letter to sellers when you make an offer to demonstrate your financial capacity to buy a house. A pre-approval isn’t a loan guarantee. But unless your financial situation drastically changes before you go to settlement, you’ll typically be approved for the pre-approved amount.
2. What should I do before applying for pre-approval?
When you apply for pre-approval, your lender will carefully review your credit history, income, assets and debt obligations to make an application decision. Before applying for pre-approval, it’s a good idea to:
- Check your credit. Lenders use your credit history to help them determine how likely it is that you’ll repay your loan on time. People with higher credit scores are more likely to qualify for loans and may qualify for lower interest rates than people with lower credit scores. If your credit needs some work, you may want to temporarily put your house hunt on hold while you work to improve your credit scores.
- Calculate your debt-to-income ratio. Your debt-to-income ratio compares your monthly income to your monthly debt payments. The lower, the better. Lenders typically like to see a ratio below 38%, but some may be willing to lend to you if your ratio is higher. If your ratio is too high, you might want to reduce the amount you owe before applying for pre-approval.
3. How do I get pre-approved?
To apply for pre-approval, you need to contact your lender and complete an application. When you apply, the lender will pull your credit and may ask you to provide the following documents:
- Pay stubs
- Bank statements
- Investment account statements
- Employment information
- A copy of a valid ID
- Tax returns
- Information about other property you own
Your application can’t be processed without all the necessary information. Gathering these documents before you contact your lender can help speed up the process. Ask your Homeowners Licensed Mortgage Professional about opportunities that can help you gather your documentation quickly and minimize your efforts in collecting them.
4. What are the benefits of getting pre-approved?
If getting pre-approved sounds like too much work, and you’re thinking of skipping the pre-approval step, consider these benefits.
- It shows sellers you’re serious. In a hot real estate market — like the current one — having a pre-approval letter is especially important. It lets sellers know you’re serious about buying a house and have the financing you need. Some sellers won’t entertain offers from prospective buyers who don’t have one.
- It helps you budget. The pre-approval letter shows the maximum amount the lender is willing to lend you. While you don’t have to borrow that much, it can help you set your maximum budget, so you don’t waste time looking at houses you can’t afford.
- It can save you from heartache. When you find the perfect house, you don’t want to hear the lender tell you that your mortgage application is denied. Applying for pre-approval can help identify areas that might prevent you from getting approved, so you can address them now rather than later.
- You can see different loan options. There are many different mortgage products available. But you may not even be aware that some of them exist. When you apply for pre-approval, you can see all the loan options you qualify for and select the product that’s best for you.
5. Will applying for pre-approval affect my credit scores?
Yes. When you apply for pre-approval, your lender will check your credit, which generates a credit inquiry and has a possibility of impacting your credit score.
6. How long is a pre-approval good for?
Pre-approvals are usually good for around 90 days, but it varies by lender. Since each credit check generates an inquiry and can affect your credit scores, it’s best to wait to apply for pre-approval until you’re ready to start your home search.
If you are ready, give us a call to apply for pre-approval at no cost. Our Licensed Mortgage Professionals will review your personal situation to help you find the product that’s best for you and make sure you’re financially prepared to buy your next home.