As you approach the home buying process, your first instinct may be to start by looking at Dream Finders Homes in your desired location or getting in touch with a realtor. But to make the process more convenient and more realistic, you should actually start by obtaining a mortgage pre-approval.
Pre-Qualification vs. Pre-Approval
A mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on a home, but a pre-approval is much more valuable. It means the lender has checked your credit and verified the documentation to approve a specific loan amount. NOTE: The approval usually lasts for a particular period, such as 60 to 90 days.
You will benefit in several ways by consulting with a lender and obtaining a pre-approval letter. First, you will have an opportunity to discuss your options and budget with the lender. Second, the lender will check your credit and find any problems. You will also learn the maximum amount you can borrow, which will help set your price range. You’ll know exactly how much home you can afford, and won’t waste time (or risk disappointment) by looking at homes that are out of reach.
Before You Start the Pre-Approval Process
Before you begin the mortgage pre-approval process, you’ll need to do some homework.
First, order a free credit report and review your credit history. If you see something that isn’t correct, contact the credit bureau immediately to get it resolved. Next, you’ll need five basic things—proof of assets and income, good credit, employment verification, and various types of documentation.
The specific documents and information include:
Pay stubs that show your year-to-date income
Two years of tax returns
Two years of W-2 forms
Statements that show your accounts, possibly including checking, savings, CDs, IRAs, stocks and bonds
Records for any other real estate you own
Your residential history for the past two years
Your landlord’s contact information, if applicable
If you don’t take these steps, your mortgage loan application could be rejected.
What Are The Benefits of Pre-Approval?
Knowing where you stand. Your pre-approval will tell you how much the lender is willing to let you borrow, which will influence the home you can buy. You can sift through possibilities confidently, knowing what your realistic price range will be.
Easier path through the formal application and purchasing process. Once you’ve found a home, the formal loan approval process should be smoother and allow you to close in less time since you have all of the important information close at hand.
Accurately anticipate costs. Going through the pre-approval process will save you guesswork. You’ll know what to expect concerning your monthly payment, including anticipating how much you need to cover for a down payment and estimate closing costs.
Locking in at a great rate. When you have all of the information for your actual mortgage application and the closing process, you’ll save a lot of time and frustration. Pre-approved mortgages provide rates that are good for three to four months. If interest rates are expected to increase, consider securing a better rate with a pre-approval.
Pre-approval takes work, but it can pay off when you’re searching for the perfect home. A pre-approval won’t guarantee you’ll get the exact mortgage in the estimate, but it will give you a good idea of how much mortgage you can qualify for.