Should Be Your First Step In Buying A Home
When Should You Get Pre-Approved for A Mortgage,
and why is Pre-approval different from Pre-Qualification?
The answer to when you should get pre-approved for mortgage is simple. DO IT FIRST even before you begin looking at houses. The reason for talking with a bank before looking at homes is this will help you understand exactly how much you can afford.
Next it is important to know that Pre-approval and a Pre-qualification are actually very different, and it’s important to understand what the differences are.
Why Pre-approval vs. Pre-Qualification?
What is a Pre-Qualification?
A mortgage pre-qualification can be best described as a “prediction” of the amount a buyer can borrow. In many cases, a pre-qualification is only as good as the piece of paper it is written on. Lenders will ask a potential borrower about their incomes, debts, and other assets and use what they are told to issue a pre-qualification. Some lenders will pull a credit report, but some will not. Not verifying information and a predictive estimate can lead to surprises in the future once a buyer goes to formally apply for their mortgage.
What is a Pre-Approval?
A mortgage pre-approval is when a lender gives their “written commitment for the amount they will loan to a potential borrower”. The mortgage pre-approval process is one in which a lender will obtain from the potential borrower their bank statements, tax returns for the past several years, verify their employment, all their debts and assets and pull a tri-merge credit report. This process does not have to take a substantial amount of time, however, does take a little more time and work organizing financial information than getting a verbal pre-qualification. however, the extra time is time well spent.
Why should you get Pre-approval as your first step? What does it do for you?
#1 Eliminate Disappointment
Pre-approval should be obtained before looking at homes because it can eliminate Disappointment. Unfortunately, there are many buyers will look at homes even though they have no clue whether they can afford that home or not. The fact of the matter is, a buyer can “fall in love” with a home, submit a purchase offer, and find out that their actual financial documents do not support the pre-qualification amount that mortgage lender gave them, and that they cannot obtain financing to buy that home. This can all be avoided by having a mortgage pre-approval before looking at homes.
#2 Is a big benefit. It gives you a chance to correct Potential Credit Problems
It’s possible and very common that a buyer isn’t aware of problems with their credit. There are minimum credit score requirements that each lender has for each one of their loan products. Another common credit problem is an error with a buyer’s credit. It’s very possible for a buyer to have an error on their credit report. There are processes to get errors removed from a credit report and ways to get credit reports improved. This is the time to do it.
#3 a mortgage professional can advise you about the type of financing that is best for you.
There are many different types of mortgages available. Each mortgage product varies from the amount of money needed down to the acceptable debt-to-income ratios and everything in between. When buying a home, it’s important for even seasoned buyers to know for certain, what the best type of mortgage product best suits their needs. There are even loan programs available for buyers who don’t have any money!
#4 You need to understand All of The Costs to Buying A Home.
There are many costs associated with buying a home. It’s not as simple as a down payment on a home. By getting a pre-approval, you will have a very strong understanding what costs you should expect when buying a home, so there are no surprises. Have the Lender and the Title Company provide you with a good faith estimate of all settlement costs. The lender will want not just your Down payment, but there are other bank charges that may include: Loan origination or processing fees, Points and possibly Mortgage Insurance Premiums, Fees for the Home inspection, Appraisal, Survey, Credit report, and funds that need to be paid for remainder of this year’s taxes and insurance as well as a year’s premiums and taxes to be escrowed for next year’s taxes and insurance. The title company will have fees due at closing for: their services plus fees for Deed recording and Title insurance policy premiums.
By getting pre-approved you have a full understanding how much money you will need to close on your dream home, who you will be paying these costs to, and also why you are paying these costs.
#5 May be the Best of all. Multiple offer situations.
It’s a possible that a home will have multiple offers. Pre-approval for a mortgage makes you a “cash buyer.” A pre-approved buyer is likely to win in a multiple offer situation against a buyer who only has a pre-qualification letter. You can also offer the seller a quicker closing than just pre-qualified buyers because the majority of the background checking has been completed by the lender and they are ready to process your mortgage.
As you can see, there are many reasons why having a mortgage pre-approval is important and why it should be done before you look at homes. If you have already started the buying process with a REALTOR, a great real estate agent will advise you that your next step is getting a pre-approval letter.
Many buyers consider the home financing process complex and confusing. IT IS NOT!
Our “Step-By-Step Guide To Home Financing” will show you howto finance your new home and end up with the right Mortgage, at the best rate and terms with a minimum of hassle.