When looking to buy a new house, it is important you get pre-approved for a mortgage. This gives you a chance to explore the loan options and understand your budget for the home you are searching for. Moreover, having a pre-approval letter enables you to determine whether you can afford the monthly payments for the mortgage.
Keep reading this article to learn everything about mortgage pre-approval.
Pre-Approval vs. Pre-Qualification
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Many mistake the word “pre-qualification” for pre-approval. But the two terms are different. When it comes to pre-qualification, you’re required to provide details about your finances, debts, and income. The lender then uses this information to determine the loan amount you can secure.
It is worth highlighting that at the pre-qualification stage, the lender does not ask you to provide data to verify your financial details or credit report.
Pre-approval, on the other hand, involves completing a mortgage application and submitting your Social Security number to the lender so they can conduct a thorough credit check. The lender will examine your credit score and credit report to gauge your creditworthiness.
Moreover, the mortgage issuer will verify your bank account details, debts, employment history, assets, and past addresses to ensure you’re able to repay the loan.
When to Get Pre-Approval
In most cases, pre-approval letters are valid for three months. Lenders include an expiry date on those letters since the borrowers’ credit scores and finances can change at any time. In the event your pre-approval letter expires, you will need to fill out a fresh mortgage application and provide updated paperwork.
So when is the right time to get a pre-approval? Seeking mortgage pre-approval about three to twelve months before you begin a serious house-hunting is recommended as it puts you in a good position to boost your credit profile. Moreover, you will have enough time to save funds for a deposit and other home-buying costs.
When it is time to make offers on a particular house, a seller will ask you to provide a loan pre-approval letter to ascertain that you are a serious buyer. In a booming real estate market, your offer is likely going to be dismissed if you fail to submit a pre-approval letter to the seller.
The Pre-Approval Process
The process of applying for a home loan can be confusing and exciting at the same time. Some lenders pre-approve your application within a few hours, while others take days. Most mortgage applications have the following elements:
Type of Mortage and Loan Terms
The application lets you pick the type of loan you wish to apply for and states the terms of each loan type.
Property Details and Purpose of the Loan
In every mortgage application, you need to give details of the property you want to buy, such as its address, legal description, and the year it was built. Moreover, you have to explain the actual purpose of the loan. State whether it is meant for purchasing a residential or investment property.
You must include your full name, marital status, Social Security number, address history, number of dependents, and schools attended in the mortgage application.
Provide the details of your previous and current employers, your job title, monthly income, and dates of employment.
Assets and Liabilities
Since the lender needs to assess if you have the financial muscles to repay your loan, they will require you to submit details about your savings account’s balance amount and your investments in bonds, stocks, and mutual funds. You must also list all your liabilities, including student loans, car loans, child support, and alimony.
What Happens After Filling Out a Mortgage Application
Once you have provided the required details in the mortgage application, you will receive a document known as a loan estimate, usually within three days. This document notifies you of the loan amount you qualify for and the monthly repayment amounts to be paid. After a few days, the lender will again notify you if you have been pre-approved for a home loan. Your application will then be sent to a loan underwriter to verify the information you provided, after which you will receive a pre-approval letter.