A Mortgage Pre-Approval Defined

A mortgage pre-approval is when a mortgage lender determines how much they are willing to lend you after reviewing your credit and financial situation. Normally, you would request a pre-approval before you start the house hunting process, so you have an idea of how much you will be able to finance.

 

Usually, after you find a house within your pre-approval amount, and you make an offer on it, you go back to the same lender for a final approval.

 

A pre-approval determines more than just the loan amount

Besides determining the size of the loan you may be eligible for, a pre-approval will also determine if you even qualify for a home mortgage at all. If you meet the mortgage lender’s minimum criteria for credit score, debt ratios, income and other determining factors, they will give you a maximum loan amount.

 

The lender will also give you a letter of pre-approval to use during your search for a home. Even though you receive a pre-approval for a mortgage loan, it doesn’t guarantee that you will qualify for the mortgage when you apply for the actual mortgage.

 

The lender is not obligated to grant you a loan based on a pre-approval. You will still need to go through a secondary review process when you apply for the final approval

 

Forms of qualification

There are different stages to the approval process, which include:

 

 

  • Pre-qualification – For this process, you provide the lender with your very basic financial information including your monthly income and debts. The lender will then give you a “ballpark” amount, based on this information, they may be willing to lend you. This process isn’t very in-depth, in most cases, you can get pre-qualified without even submitting a mortgage application.

 

 

 

  • Pre-approval – This is a more useful and in-depth version of a pre-qualification. When you get pre-approved for a mortgage loan, the lender will actually start to verify your financial situation. This is the difference between a pre-approval and pre-qualification. The lender will request several different documents from you including tax records and bank statements. They will also look into your credit score. The pre-approval process gives you a more accurate idea of how much you can borrow, making it a great idea to pursue before you start house hunting.

 

 

 

  • Approval  – This is the lender’s final approval. This process will take place after you have decided on a home and made an offer to buy. At this stage you need to provide your mortgage company with a copy of the purchase agreement and go through an extensive underwriting process that could take up to 30 days.

 

 

The benefits of having a pre-approval

It only makes sense to get a pre-approval before starting the search for your new home. Without one, you could spend weeks looking at houses until you finally find one you like. Then, when you apply for a loan, you find out the home you want is out of your price range, or worse you don’t qualify for a loan at all.

 

The best case scenario, you have to start the search all over again, this time, with an idea of the price range you need to stay within. This is why there are several benefits to obtaining a pre-approval before you start your search for a home. Other benefits to getting a pre-approval include:

 

  • A pre-approval will help you find any financial problems you may have, such as too much debt, a low credit score, low income, etc. The sooner you find out about these problems, the sooner you can start to correct them and move on to buying your home.

 

  • If a real estate agent knows, ahead of time, you will most likely qualify for a loan and how much it will be, they will be more willing to work harder to help you find a home within your price range.

 

  • Sellers are more willing to take your offer seriously, as opposed to a potential buyer that hasn’t even talked to a lender yet and there is no guarantee they will even qualify, let alone be able to afford the asking price.

 

  • It is the logical way to shop for a home because you have an idea of the amount you will be able to finance and you can stay within that price range.

 

How to get a pre-approved home loan

The first step in getting a pre-approved home loan is to find a lender or broker. When you have chosen a mortgage lender or broker, you are ready to submit an application for pre-approval.

 

Fill out the application, including details about the type of loan you need. After reviewing your information and checking your credit score, they will let you know how much they may be willing to lend you.

 

Documents you will need to apply for a pre-approved mortgage

The list of documents you will need to apply for a mortgage pre-approval will vary, based on the lender you use. However, most lenders will ask for the following items:

 

 

  • Verification of Income – This is a common request that usually includes your two most recent pay stubs.

 

 

  • Verification of Employment – This is usually a list of your employers for the last two years and their contact information.

 

  • Place of residence – You will need to provide the addresses of where you have lived in the last two years.

 

  • Bank information – Normally lenders will request the information for all of the bank accounts you have, including checking, savings or money market accounts.

 

  • Tax information – Lenders typically want to see your W-2 statements and tax returns for the last two years.

 

  • Other assets – Lenders will want documentation of any other assets you have including CDs, stocks and bonds or an IRA account.

 

  • Credit information – Lenders will usually ask if you have any outstanding loans such as car loan, student loans or any other type of loan.

 

  • Monthly expenses – There are some lenders that require an itemized list of your monthly expenses including rent, credit cards, student loans, etc.


The lender you choose will provide you with a complete list of the documents they will need to complete the pre-approval process.

 

If you enjoyed this article and need a professional writer for your own blog, please feel free to send me an email, or check out my profile on oDesk.

 

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