Table of Contents
A pre-approval letter from a lending institution can be a crucial step in the home-buying process. Preapproval letters allow you to discuss loan options and with a lender; this step can help you to better understand your total house-hunting budget and the monthly mortgage payment that you can afford.
As a borrower, it is critical to understand what a mortgage pre-approval is (and isn’t) and how to improve your chances of getting one.
Before deciding to pre-approve you for a mortgage, lenders will consider several key factors:
Consider a mortgage pre-approval to be a financial physical. Lenders will most likely probe every aspect of your financial life in an attempt to ensure that you will repay your mortgage.
You have probably heard the terms “pre-qualification” and “pre-approval” used interchangeably, but they are not the same thing. A pre-qualification is a summary of your finances, income, and debts that you provide to a mortgage lender. The mortgage lender will then provide you with an estimated loan amount.
As a result, a mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on a home purchase.The lender, however, does not obtain your credit reports or verify your financial information. As a result, pre-qualification is a useful starting point for determining what you can afford but has no bearing when making offers.
A pre-approval, on the other hand, entails filling out a mortgage application and providing your Social Security number so that a lender can run a hard credit check. When you apply for a mortgage, you will be subjected to a hard credit check. Before deciding to lend you money, a lender will pull your credit report and credit score to assess your creditworthiness. These checks are recorded on your credit report and have the potential to affect your credit score. A soft credit check, on the other hand, occurs when you pull your own credit or when a credit card company or lender pre-approves you for an offer without your asking. There is no impact on your credit score from a soft credit check.
In addition, you will list all of your financial accounts, assets, debts, employment history, and other pertinent information that a lender will need to verify. The reason for this is that a lender, above all, wants to ensure that you will be able to repay your loan. Lenders will also use the information you provide to calculate your DTI ratio and loan-to-value (LTV) ratio, which are important factors in determining your interest rate and loan type.
Because of this, a pre-approval is far more valuable than a pre-qualification.In order to approve a specific loan amount, the lender must have checked your credit and verified your documentation. Final loan approval occurs after an appraisal is completed and the loan is applied to a property.
Typically, mortgage pre-approval letters are valid for 60 to 90 days. Because your finances and credit profile may change, lenders include an expiration date on these letters. When a pre-approval expires, you must complete a new mortgage application and provide updated documentation to obtain another one. If you are just starting to consider buying a home and suspect you will have trouble getting a mortgage, going through the pre-approval process can help you identify credit issues—and potentially give you time to address them.
A year or more before you start looking for a home, get pre-approved for a mortgage to help build your credit. You will have more time to save for a down payment and closing costs as well.
When you are ready to make an offer, a seller may request a mortgage pre-approval and, in some cases, proof of funds to demonstrate that you are a serious buyer. Because of intense buyer demand and a limited number of homes for sale in many hot housing markets, sellers have an advantage; they may be less likely to consider offers without pre-approval letters.
NMLS#: 1218967 | www.nmlsconsumeraccess.org
725 N. Hickory Avenue; Suite 200
Bel Air, MD
Office : 443-619-7900