If you start looking for your new home before you know how much you can afford to spend, you will be in for some disappointment. It is effortless to start looking at homes that you will later find you can't afford when you try to get approved for a mortgage. However, if you have a mortgage preapproval, you will know where you stand and be in a stronger position when making an offer.
Let’s review what a preapproved mortgage is and how to apply for one. Getting preapproved will put you in a much better position to land the home you want.
The preapproval process shows you how much a lender is willing to help you purchase your home. The lender will look at your finances, income, outgoings, credit score, and more to assess your ability to pay.
Not only does the preapproval show you how much you can borrow to buy your home, but it gives you an indication of the interest rate you will pay.
You might hear the term “prequalification” when talking to a lender; though it isn’t the same as being "preapproved," there are similarities. The two terms are frequently used interchangeably by lenders as well, which doesn’t help matters.
Prequalification doesn’t typically require as much information from you, and your lender won’t run a credit check either. As such, this qualification process will only give you a rough idea of the size of mortgage you can get. When you actually try to get approval for a loan, you might find you don’t get the amount you anticipate if you have only been prequalified.
The preapproval process will often require you to provide bank statements, pay stubs, and more. The lender will also pull your credit report so that they will see your credit score and the amount of debt you have. There will be an employment verification process, as well.
A preapproval will give you a good understanding of the amount you can afford to spend on a home, but you will still need to get full approval when you find a property you want to buy. Additional checks will need to be made by the lender, including a home appraisal.
The lender needs to be sure the home is actually worth the amount you have agreed to pay for it. If the appraisal amount is lower than the offer you’ve made, the mortgage could be declined.
The lender will also need to check that the title is correct. This means that they will work with the title company to ensure the seller owns it and there aren’t any liens against it.
Another factor can be the condition of the home. If there are problems like cracked windows or a roof that needs repair, there can be problems with some loan types. The FHA loans program requires that issues like these are resolved before the home can be closed.
Lenders are also particular about where your money is coming from as well. If you have significant cash deposits, they will want to verify where this money is coming from. They do this because they have no idea if these funds are being given to you are not actually money you earned.
A mortgage preapproval helps you understand the homes you can afford to buy, saving you from looking at properties that are out of your price range. Many real estate agents will want to know that you are preapproved before they will show you homes.
When you make an offer, it makes your bid a lot stronger if a mortgage preapproval backs it up. If the seller has a few offers to choose from, they are more likely to go for the one that is less likely to fall through. Preapproval shows sellers that your offer is more serious since you have the finances ready. A seller will be more confident they will be moving their home from contingent status to pending when they know a buyer's finances are rock solid.
Preapproval can also cut down on the time it takes to close on the home. When you already have a preapproved mortgage from your lender, some of the work has already been done, and your loan won’t take as long to approve fully. This can be important if either you or the seller needs the process to move as quickly as possible.
You will normally get a preapproval for mortgage letter when you have gone through the process with your lender. This letter can then be shown to real estate agents to take you seriously and show you homes.
The letter will also be needed to show to the seller so that they are happy your offer can be honored. This reduces the chances that the sale will fall apart due to financing problems.
The first stage of the preapproval process is finding a lender to give you a good deal on your mortgage. However, even before this, it is an excellent idea to make sure your financial situation is the best it can be.
Check your credit report so that you can fix any issues that could end up costing you a lot of money extra for your mortgage. If you know you have some minor credit issues but aren't quite sure how you can get your score bumped up quickly, you could try using Credit Karma. They are an excellent vehicle to use for improving your credit standing and free to boot.
Compare lenders based on the interest rate they offer and the fees they charge. Once you find a lender you are happy with, you can apply it to find out what they will offer to you. However, you don't have to stick with that lender when you actually go for approval if you find a better offer.
You will need to fill out an application, which may happen online, telling them about your financial situation and personal details. While they won’t require you to provide documents to prove your income and assets, you should have these figures ready to fill out the application. They will need these documents when you apply for preapproval, however.
They will check the information you have given them to provide a mortgage offer to you. This should show you how much you will need to find for a down payment and what your closing costs are likely to be.
If you are happy with the mortgage available to you from that provider, you can apply for preapproval. If you are successful in your application, you will get a mortgage preapproval letter so you can begin to find your ideal home. Getting preapproved for a mortgage doesn't have to be just for a single-family home. The preapproval could be for a condo or townhouse purchase, a two-family, or even a land loan.
Getting your hands on a mortgage preapproval letter is a necessary step to show sellers and real estate agents that you are a serious buyer. It will also give you a better understanding of how much a home loan will cost you and what you can really afford to buy.
Hopefully, you have found these tips on mortgage preapproval to be useful.