You might have heard that you should get pre-approved for a mortgage before you even start looking for a house. But why? Why go through all the trouble of getting a pre-approved mortgage, when you don’t even know which house you will buy yet?
The answer is because there are three parties who benefit from pre-approved mortgages:
- You
- Your realtor
- The seller
Benefit To You
Of course, of the three, you are the most important beneficiary. Applying for a mortgage loan pre-approval is the best way to realistically evaluate your chances of getting a mortgage, and find out how much you can afford. The time you spend getting a pre-approval for mortgage is never wasted, because you need to submit exactly the same information anyway, when you make your final loan application. Think of it as being one step ahead in the process. And at the same time, you are proving to all parties involved that you are a diligent and prepared buyer who should be taken seriously.
Your Agent Benefits
By knowing what your financial limitations are, your real estate agent can spend more time looking for houses that fit your profile, and less time chasing dead ends. Your mortgage pre-approval eliminates a lot of wishful thinking. No matter how much you might want that 4-bedroom home with a pool for $375,000, if your pre-qualification states $250,000, well, that settles the matter right there.
The Seller Benefits
The seller wants to receive serious offers only. When you make an offer, you include a copy of your pre-approval letter as proof that you are ready, willing, and able to afford the house. The seller will receive such an offer much more seriously than one where the buyer’s financial ability is unknown. When it comes time for the hard negotiations, you will be in a stronger position having a motivated seller who knows that the deal is realistic, and not just a waste of time.
Pre-Qualification
The first step toward getting a pre-approved mortgage loan is called pre-qualification. Being pre-qualified means that you have met with a loan officer who has collected some basic information about your financial status: income, debt, and assets. The officer has looked at your credit profile and talked to you about your background, goals, and down payment or deposit resources.
The purpose of pre-qualification is for your loan officer to get an idea of which of the many available mortgage programs would be right for your individual situation. You can think of it as a screening process, where you start weeding out the types of mortgage programs that are wrong for you. Once this step is complete, you are ready to move on to apply for one or more specific pre-approved mortgages.
Pre-Approval
The next step, getting pre-approval for mortgage, requires you to complete the full loan application and submit all of the appropriate documentation for review by the loan officer. At this point, you have normally not found a property yet, so when filling out the application, you leave any reference to the property blank.
Once finished, your loan officer usually submits the application to electronic underwriting, and the computer gives the loan officer a quick response, normally within 24 hours. If the application comes back approved, then you are officially a “pre-approved buyer”, congratulations! You finally know for sure how much house you are able to afford.
You should remember that the loan amount that you qualify for is the maximum that the lender feels that you can afford to borrow. It is not necessarily the amount that you should spend. It is safer to be a little bit conservative when setting your house shopping budget.
For example, if you received a mortgage loan pre-approval for $150,000, and you have $30,000 cash available as a down payment deposit, then your maximum house price is $180,000. But what about moving expenses, closing costs, repainting, new furniture or drapery, lawn and garden equipment, and a budget for repairs? If you spend every last dollar you have, then you may find yourself moving into a house lacking some very necessary items. It might be smarter to look at houses in the $160K- $170K range, so as not to stretch yourself to the limit.
You can see that it’s not always a good thing to get a pre-approval mortgage letter for the “maximum amount”. Sellers will see this amount, and if it exceeds the purchase price, they might be less likely to negotiate a price reduction. Get pre-approved for only the amount you want to spend.
Tips To Get Started
- Get pre-qualified first (fewer documents required) to point you in the right direction.
- Don’t pay an application fee. Find a lender who will get you a pre-approved you for free.
- If you don’t want to use a local bank, use the internet. Several sites can get you preapproved mortgage offers at no cost to you.
- Get a copy of your mortgage pre-approval letter for only the amount you want to spend, not the maximum.
- Take your pre-approval letter with you when you go looking at houses.
- Getting a pre-approved mortgage from one lender doesn’t mean you have to close the loan with that lender.
- At your request, most local mortgage brokers will visit your home or office to review the necessary documents.
Prepare Your Documentation
Now for the really fun part. Here is a list of information you will need to assemble before applying for a pre-approved mortgage. Especially if you are a new buyer applying for your very first mortgage, the list can seem daunting. The good news is that when the time comes to submit your final application, most of the work is already done!
Income Documentation
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Asset Information
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Liability Information
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Miscellaneous Information (May Be Required)
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