Buying a house in any market is a big decision but entering today’s housing market can feel intimidating. You want to do it right and you want the process to be as stress-free and uncomplicated as possible.
One thing you can do to help you prepare is to get pre-approved.
Getting pre-approved for a home loan is an easy process that provides a realistic picture of what you can qualify for so you do not end up falling in love with a property outside of your budget. It will also help you move more quickly when you find that perfect place, giving you a better chance of scoring your dream home before someone else has the chance.
If you are considering buying a home this year, take the first step and get pre-approved today, or read more about what is involved.
Understanding the Difference: Pre-Qualification vs. Pre-Approval
Pre-Qualification
Pre-qualification is the first step in your mortgage application process. It will help you to understand the approximate loan amount you can expect to qualify for. You will begin by sharing your financial information—debt, income, assets, etc.—with your bank or lender. After reviewing the information, the bank or lender will give a loan estimate. The process is relatively simple, only taking a few business days to process.
Keep in mind that while pre-qualification gives you a rough idea of the mortgage amount you may qualify for, it is not a guarantee. It is more of an informal conversation and does not involve a thorough analysis of your financial documents.
Pre-Approval
On the other hand, pre-approval is a more comprehensive and formal process. Essentially, pre-approval is a snapshot of what you’re likely able to borrow for a home. It’s based largely on information you provide to a lender, so the final amount could change somewhat once you’ve gone through the full underwriting process, where an underwriter verifies all of the necessary information to understand what you’ll be able to comfortably borrow. Pre-approval also usually involves a credit check so the information is more solidly based.
What to Expect During the Mortgage Pre-Approval Process
Pre-approval is the closest you can get to actually taking out a loan without firm commitments on either side (you are not committing to borrow anything, and the lender is not committing fully to lending you anything—yet). So, to get a pre-approval letter that sellers will take seriously, the lender needs to see enough details about your situation to make an accurate estimate of how much they are able to offer you.
The exact personal information you will need to provide may vary, but generally, here’s what you will need to have handy:
- Your full name, address, and contact information
- Employment information, including your employer’s name and contact information, job title, and income
- Information about your monthly expenses, including any outstanding debts or other financial obligations
- Documentation of your income, such as pay stubs, W-2s, and tax returns
- Documentation of any assets you have, such as bank statements, investment accounts, or retirement accounts
What Documentation You Need
To get pre-approved, you will need to provide a mortgage lender with a good amount of paperwork. For the typical home buyer, this includes the following:
- Pay stubs from the past 30 days showing your year-to-date income
- Two years of federal tax returns
- Two years of W-2 forms from your employer
- 1099s if you are self-employed
- Bank statements for the past two to three months
- Statements (for the past quarter or 60 days) of all of your asset accounts, including checking and savings, as well as any investment accounts (e.g., CDs, IRAs, and other stocks or bonds)
- Any other current real estate holdings
- Residential history for the past two years, including landlord contact information if you rented
- Proof of funds for the down payment, such as a bank account statement
Why Is Pre-Approval So Powerful?
It is not just about getting a piece of paper. Here are five key benefits that will empower you as a buyer:
- Know Your Budget, Avoid Wasting Time:Knowing how much home you can afford helps you focus on the houses that fit in your budget, saving you time during your house hunt. A lender will review your application and let you know how much they are willing to loan based on your verified income and assets.
- Navigating Multiple-Offer Scenarios:With more buyers than available homes, multiple-offer scenarios are common. Pre-approval becomes your secret weapon, giving you an edge over other buyers. It not only helps you zero in on the right price range but also positions you favorably in the eyes of sellers.
- Speed Up the Process, Close Faster: Once your offer is accepted, you’ll be counting down the days to move in. Unfortunately, the closing process can often drag on, leaving buyers feeling like they’re in post-purchase limbo. Pre-approval will speed up the closing process, since the mortgage approvals have already been taken care of, allowing you to focus on next steps like appraisals and inspections.
- Secure Better Rates, Save Money: Getting preapproved means it’s unlikely you’ll fail to get financing, and it may also help you pay less in mortgage interest rates. Locking in a favorable interest rate during pre-approval can save you thousands of dollars over the life of your loan, especially if rates are expected to rise. Think of it as an investment in your future financial stability.
How Your Finances Can Affect Your Pre-Approval
When it comes to getting pre-approved for a mortgage, there are several factors that lenders consider, including:
Income: Your lender will check your income to assess the likelihood that you’ll be able to afford the mortgage payment. In general, your lender likely wants to see that your housing costs don’t exceed 28% of your gross income.
Debt: When determining how much you can borrow, a lender will compare your monthly debt payments to your gross monthly income to determine your debt-to-income ratio (DTI). If you have an extensive monthly debt burden – for example, a high DTI ratio – your preapproval amount will be lower. But if you can eliminate some of these debts – such as credit cards or personal loans – from your books, then a lender may be willing to increase your preapproval amount.
Assets: Your assets, such as savings accounts, investment accounts, and retirement accounts, can also impact pre-approval; that’s because lenders want to see that you have enough savings to cover your down payment and closing costs and that you have a financial cushion in case of unexpected expenses.
Credit History: Your credit scores and history help a lender determine whether you qualify for a mortgage within its underwriting structure, as well as the mortgage rate you’ll receive.
Employment History and Income: Your employment history is one part of your background that helps a lender discern your ability to repay the loan. The lender will ask for your employer’s name and contact information, your job title, and dates of employment. They may also request a verification of employment from your employer to confirm your income and employment status.
Find the Right Agent
Windermere’s community of real estate professionals is our greatest asset. We have experts in all areas of real estate, from your typical starter home to condos, luxury properties, and new construction. While residential real estate is the mainstay of our business, Windermere also has offices and associates who specialize in property management, commercial real estate, and relocation services. To further facilitate the home buying process, Windermere has affiliated partners in certain regions to provide mortgage, title, and escrow services.
Call us today with any questions or concerns. Our professional Real Estate Agents will help you through this exciting process. (951) 369-8002