Pre-approvals help eliminate the guesswork when shopping for a property. Mortgage lenders can determine early on whether you qualify for a home loan and how much you can afford. Therefore, you don’t waste time looking at houses outside your budget.
A pre-approval also tells realtors and sellers that you’re a serious buyer. It might come as a shock, but some sellers will not accept offers from bidders who are not pre-approved. Since sellers are eager to sell their homes and move on, they don’t want to take a chance with someone who might not be able to get financing.
Pre-Qualification vs. Pre-Approval
It’s important not to confuse a pre-approval with a pre-qualification. Both are preliminary steps in the mortgage process, but there are differences.A pre-qualification is an initial assessment of whether you meet the qualifications for a mortgage, but it doesn’t guarantee financing. Pre-qualifications are based on the information you provide on a pre-qualifying form, which only asks for basic information like monthly income and an estimation of your credit score.
Understand, however, you can’t get a mortgage off a pre-qualification. A pre-qualification says you might be a good candidate for a mortgage. A pre-approval, on the other hand, goes a step further. Getting pre-approved for a mortgage involves completing an official loan application with the bank and going through the underwriting process.
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What a Mortgage Pre-Approval Entails?
With a pre-approval, the mortgage lender will pull your credit and carefully scrutinize your credit activity and debts. You’ll have to submit your recent paycheck stub and tax returns from the past two years, plus provide copies of bank statements and disclose any assets you have.Based on all of this information, the lender decides whether you’re eligible for a mortgage, and determines how much house you can afford. A preapproval letter is the official green light to start looking for a house. If you must choose between a pre-qualification and a pre-approval, go with the latter. Unlike pre-qualifications, pre-approvals are practically written in stone, providing your credit, job status and income doesn’t change prior to closing.
Avoid Jeopardizing a Mortgage Pre-Approval
It’s important not to make any significant changes to your personal finances after getting pre-approved for a mortgage. Something as simple as getting store financing or financing a new automobile can jeopardize a mortgage approval.This mortgage approval is based on your debt and income at the time of applying for the pre-approval. Getting a new auto loan or acquiring some other type of debt before closing increases your debt-to-income ratio. And with a higher debt-to-income ratio, there’s the risk of being disqualified for the mortgage. So wait until after closing to apply for financing.
The lender will check your credit about one or two days before closing to ensure no changes to your credit history and score. If everything checks out fine, you can proceed with closing and get the keys to your new house.
source: totalmortgage.com
