Purchasing a home is a huge deal and investment. Not a lot of people have the ability to purchase a home in full, so they take out a mortgage. But, did you know that you can be preapproved for one before you start house hunting? With so many houses selling well above listing price, getting preapproved for a mortgage helps you figure out your top price point and gives you a competitive edge over other buyers. Here is how to get pre approved for a mortgage, a step by step instructional guide.
If you haven’t noticed, the real estate and housing market is beyond hot right now. What’s the deal with that? Well… you can thank the pandemic for that. In the last year, most have switched to working from home and companies aren’t requiring employees to come back. That has prompted homebuyers to start looking for a new place to live, knowing that they’re able to retain their job. According to CNBC, the google query of “when is the housing market going to crash” spiked 2,450% during the months of March and April.
Quick Information About Mortgages To Know Before Pre Approval
To understand mortgages, you need to know common terms that are used with the process:
- Borrower: a borrower is the person who is taking out the mortgage loan. They are borrowing money from the bank, credit union, or mortgage loan companies.
- Co Borrower: This is for when there are two people who filed. Both of the incomes, assets and credit histories are utilized to qualify for the loan. Both are equally responsible for mortgage payments and ownership over the property. It is not a requirement to have more than one person listed on the mortgage, but it strengthens the chances to qualify for a larger mortgage. This could be a spouse, family member, or friend.
- Lender: the mortgage lender is the financial institution or organization that gives loans for real estate purchases. The lender evaluates the financial condition of the borrower and assesses any risks they could present on repaying the loan.
So, What is a Mortgage?
Mortgages are a form of loan used by individuals and businesses to purchase a house or real estate property without paying full price of the home at purchase. Instead, you take out a mortgage loan to support the purchase and prove you’re able to make monthly payments on the property. Borrowers pay back the loan every month for a specified period of time, usually 30 years. This loan is in place until the borrower pays it back in full, owns the property, or sells the house.
Think of a mortgage like an agreement between you and the lender, where if you don’t make your payments, the lender has the right to take the property. If a borrower stops making payments, the bank puts a lien against the property and can foreclose the property. Foreclosing means that the bank then takes the ownership of the house and sells it as collateral for the remaining loan amount. Additionally, the borrowers are evicted.
There are important factors that you want to keep in mind when searching for a mortgage.
- The size of the loan you’re taking out
- What the interest rate is
- The Annual Percentage Rate (APR)
- The closing costs of the loan and if there are lender’s fees
- How long the loan term is and how long you have to repay it
- What type of interest rate it is (example: is it a fixed interest rate or is it adjustable?)
- Any risky clauses, such as a prepayment penalty, balloon clause, or negative amortization
- Focus on how much you can afford to pay, not the highest amount you can qualify for
What’s the Benefit of Being Preapproved?
It may seem like a waste of time to get preapproved for a loan, but don’t let that deter you. In fact, there are so many benefits to being preapproved for a mortgage. First, having the preapproval makes it easier for you to start shopping for homes. There are many realtors who require their clients to be preapproved prior to shopping, as it makes it an easier process for you and your realtor. Additionally, realtors know that this makes your offer stronger than other bidders! This is because sellers aren’t always looking for the highest dollar amount, many are looking for offers that they’re confident in. They want to make sure that the offer they choose is not going to fall through at the last minute. Being preapproved shows that you’re serious, dedicated, and you know that you’re financianed for the amount you’ve offered.
Another reason to be preapproved for a mortgage is because it takes away some of the necessary documents that need to be done prior to closing on the house. This way, you can opt for a quicker close and just focus on getting ready for your move instead of worrying about documentation coming in on time.
Being Pre Approved Versus Being Prequalified
While both of these terms refer to a letter stating that a lender is willing and able to loan you money, they’re actually two different things.
Prequalification is a bank approved letter showing where the borrower’s finances are, along with verbal information about what the bank will provide. You’ll want to be prequalified when you’re shopping for different mortgage lenders, giving you an idea of how much your loan amount can be, the expected interest rate, and other terms. However, since this isn’t a thorough look into your finances, the number is only an idea, rather than a concrete number. Ideally, you’ll want to shop around a few different lenders and find the best deal possible.
On the other hand, a preapproval is more in depth. A preapproval shows formal documentation regarding income and assets, along with bank information, statements, and retirements. This gives a more thorough credit review. Pre Approval also supplies the borrower with information regarding mortgage loan amount, interest rate, and other rates, but it’s based on a more comprehensive review. That way, you know for certain how much money you can work with.
How to Get Preapproved for a Mortgage
A mortgage pre approval is the process in which you’re determining how much money you can borrow from the bank to purchase a home. The bank is going to require a few different documents and information to determine the amount you can be preapproved for.
Think of the preapproval process as a mortgage application. The lender wants a comprehensive and thorough check on your finances. You should be prepared to provide and disclose the following information:
- Proof of income
- Verification of employment
- Credit history
- Identification
- Your debt to income ratio (DTI)
- Assets and any proof of assets
- Pay stubs
- W-2 statements
- Bank statements
- License
- Social security number
Having all of these necessary documents helps the processing go smoothly and efficiently. You can expect to receive an estimation within three business days. This estimation is letting you know whether you’re able to be preapproved and the amount you’re pre approved for.
How to Get Preapproved for A Mortgage: The Letter
Once you’ve officially been preapproved, you’ll receive a letter from the lender. This just shows you, your realtor and any buyer that you’ve gone through the process of being preapproved. The letter will include the amount you’re preapproved for, helping your realtor find you homes within your budget. You’re able to share this letter with the seller in conjunction with your offer. Again, this shows that you’re not going to have any problems with financing what you’ve offered, giving you a strong and competitive advantage.
However, these letters don’t last forever! Once you’ve received it, check the validation date to ensure that you’re within your window of opportunity. Typically, a pre approval is valid for 60 to 90 days, but you can request a renewal. Upon renewal requests, you will have to provide the initial information you gave with up to date financial statements.
What’s the Next Steps After Pre Approval and Submitting an Offer? Learn about Approvals for a Mortgage
Just like there’s a difference between preapproval and prequalification, there’s also the difference between being preapproved for a mortgage and approved for a mortgage. A preapproval is helpful when it comes to shopping for the house, but an approval is needed once you’ve found and purchased the home. It’s important to remember that getting a preapproval is not a guarantee that you’ll be fully approved. However, this only happens if something changes such as a new job, different debt to income ratio, or if there are additional conditions required that weren’t required at the time of your pre approval.
Here are some common items that the lender will require in order to get you fully approved:
- The appraisal value of the home. This is done by the lender to ensure that you’re not overpaying on a house.
- The title company needs to confirm who owns the property to double check that there aren’t any liens or claims against the property.
- The condition of the home. Some loans require that the property is inspected and meets standards before the loan closes. The standards that can affect the loan include cracked windows or a roof that needs to be replaced.