Building a Basic Understanding
When you’re beginning the home-buying process, figuring out what you need to get
your mortgage loan can seem complicated. You may even be tempted to find your
dream home first before you apply for a mortgage. However, going through the
pre-qualification and pre-approval processes at the start of your search can make the
entire experience go more smoothly.
Before you meet with a lender or mortgage broker, you should have a good
understanding of how the loan process works and what you’ll need to provide in your
application. This guide covers the basics of loan application, qualification, and approval.
You can learn what sort of information you have to provide at each step and what you
can expect during the process.
When you start looking into mortgage information, you’ll probably notice references to
two specific types of letters: pre-qualification and pre-approval. While these terms sound
similar, they mean different things.
Some lenders use these terms interchangeably to refer to the process of a borrower
providing financial information for the lenders to figure out approximately how much they
are willing to finance. However, most lending institutions treat the pre-qualification and
pre-approval stages differently.
In general, pre-qualifying for a certain loan amount doesn’t necessarily guarantee you
will be approved for a mortgage of that amount. Before you get your heart set on
purchasing a home in a certain price range, you may want to go through both pre-loan
(qualification and approval) to ensure you can actually secure a mortgage for the
amount you want. Making an offer on a property with a pre-approval letter in hand can
also give the seller a favorable impression of your seriousness and financial situation.
What a Pre-Qualification Letter Means
Before you start attending open houses and browsing through online MLS listings, it’s a
good idea to get your finances together. The best place to start is by securing a
pre-qualification letter. This is essentially a document from a lender stating that you
likely meet the requirements to secure a loan of a certain size, based on your stated
finances but not based on any documentation. Perhaps the most important thing to
understand about pre-qualifying is this: A pre-qualification letter from a lender is not a
loan approval or a guarantee that the lender will provide you with a mortgage of the
stated amount.
When you pre-qualify for a loan, you usually provide a lender with a top-level overview
of your financial status. While some lenders pull your credit report as part of this
process, others wait until the pre-approval stage to complete a credit check. In most
cases, pre-qualifying is free and can be completed over the phone or online. Many
lenders require specific information during this phase:
Contact information
Income data
Summary of monthly payments toward debts, especially those a credit check
may not indicate
Financial assets (most lenders only require approximations at this point)
Information on the home you’re looking for
If you are applying for a loan with a co-applicant, you’ll have to provide this information
for both parties. Some lenders may request additional documentation, such as tax
returns or bank statements, especially if one or both of the applicants is self-employed.
If you are looking for a mortgage within a reasonable price range and have a fairly good
credit history, getting a pre-qualification letter should be reasonably simple and quick.
Once you have your letter, you can start looking at the different available mortgage
options and talking with a lender about which one is best for your situation. Additionally,
pre-qualifying means you’re on your way to securing a loan approval.
What a Pre-Approval Letter Means
If you want to make sure you have your financial ducks in a row before you make an
offer on a home, you can continue working with a lender to get pre-approved for your
mortgage. Unlike pre-qualification, pre-approval generally involves a much more
in-depth look at your financial circumstances. In most cases, you follow several steps to
secure approval:
Completing an official loan application
Submitting financial documentation
Agreeing to a credit check
If you meet all the lender’s requirements, you will receive a pre-approval letter. This
document provides more of a commitment than a pre-qualification letter, though nothing
is official and guaranteed until you sign the papers to close on the loan.
There are two significant advantages to going beyond mortgage pre-qualification and
securing a pre-approval letter. First, you will know exactly how much you can afford to
spend on a house and what your monthly payments will look like for a loan of that size.
Additionally, you can let a seller know that your offer is serious and legitimate; he or she
won’t have to worry that the deal will fall through because you can’t secure a mortgage
for the right amount. Having your financing arranged before you make an offer can give
you a significant time advantage over other buyers, especially in a competitive market.
What Happens Next
Is the pre-approval letter the final step in the process of getting a mortgage and
purchasing your new home? No, there are more steps after pre-approval. Most lenders
want to approve the property you are purchasing so you will need to get the house
appraised. Lenders also check your income, assets and credit again to ensure
everything is the same as it was when you got your pre-approval. Once you have been
approved for the amount of the loan and the lender has signed off on the house you
want to purchase, you should receive a loan commitment letter.
Before you can close on your home and move in, you have to secure homeowner’s
insurance. Finally, your title work is drawn up, and then you meet with all the interested
parties to sign everything on closing day.
How To Simplify Your Home-Buying Process
While buying a new home can be an exciting time, it can also require complex
paperwork, especially when it comes to securing a mortgage loan. In most cases, there
is no requirement to have your mortgage approval before you make an offer; however,
having your financing approved can increase your chances of having your offer
accepted. If you’ve completed the pre-qualification and pre-approval steps, it can also
shorten the amount of time it takes to finish all the official paperwork and close on your
loan.
Source: https://www.getloans.com/ by Brian Martucci