The journey to homeownership can be an exciting adventure filled with choices, dreams, and the promise of a place to call your own. However, in the fast-paced and competitive world of real estate, securing the keys to your dream home comes with its challenges. This is where the mortgage pre-approval letter steps in as a powerful ally, transforming your aspirations into reality.
The pre-approval letter is a crucial step that should be sidestepped when purchasing a home.
A mistake many buyers will make during the home-buying process is to start by looking at homes first. But the first step should be sitting down with a mortgage originator and getting a solid pre-approval.
Getting pre-approved for a home loan early on will reap significant benefits.
This comprehensive article will examine the mortgage pre-approval letter, its significance and its many benefits. Whether you’re a first-time homebuyer or a seasoned investor, understanding the power of the pre-approval letter is the first step towards achieving your homeownership goals.
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What Is A Mortgage Pre-Approval Letter
On the surface, your pre-approval letter may seem like a silly piece of paper. But it is so much more than that.
A proper pre-approval is when a mortgage officer vets your ability to secure a home loan for a certain amount. They will check your credit, verify your income with paycheck stubs and W2s, review your employment history, and review your debt-to-income ratio.
Based on your profile, the loan officer will identify loan programs for which you will qualify. From there, they will issue a pre-approval letter stating the price of a home you for which you will be eligible.
A Mortgage Pre-Approval Letter Is Not A Commitment To Lend
A pre-approval is not a commitment to lend. It is a preliminary look at your borrower profile. Ultimately, it is an opinion of eligibility for one or more programs from a loan officer.
A final Commitment to Lend will be issued just before your loan closes. This is when an underwriter thoroughly reviews your mortgage application and supporting documents and makes sure your loan is fully compliant for the specific loan program.
A Pre-Qualification Letter versus A Mortgage Pre-Approval Letter
The terms “pre-qualification” and “pre-approval” are often used in the context of obtaining a mortgage, but they serve different purposes and involve different levels of scrutiny from lenders. Here’s a breakdown of the key differences between them:
Pre-Qualification:
Definition: Pre-qualification is the initial step in the mortgage process. It’s a preliminary assessment of your financial situation based on the information you give to the lender.
Process: To get pre-qualified, you typically provide basic information about your income, assets, debts, and credit score to a lender or mortgage broker.
Verification: There usually needs to be more verification or documentation involved in pre-qualification. The lender takes the information you provide verbally. Often, just one credit score will be pulled, and not a tri-merge from all three bureaus.
Accuracy: Pre-qualification roughly estimates how much you can borrow, but it’s not guaranteed. It’s based on your information and needs a thorough analysis of your financial situation. Without thoroughly reviewing documents, mistakes can be made.
A pre-qual is suitable for rough numbers when deciding when to purchase a home.
Pre-Approval:
Definition: A mortgage pre-approval is a more rigorous and formal process. It involves a comprehensive evaluation of your financial status by a lender.
Process: To get pre-approved, you submit detailed financial documents, such as bank statements, pay stubs, tax returns, and credit reports, to the lender.
Verification: Lenders verify the information you provide during pre-approval. They check your credit, income, employment, and other financial details to determine the maximum loan amount you qualify for.
Accuracy: Pre-approval provides a more accurate assessment of your borrowing capacity. It’s a conditional commitment from the lender, stating that they are willing to lend you a specific amount of money, pending the property appraisal and other final checks.
You’ll need to have a pre-approval once you decide to move forward on a purchase.
In summary, the key difference between a pre-qualification letter and a mortgage pre-approval letter is that one credit score is pulled and not the full Tri-merge credit score is the level of scrutiny and verification involved. Pre-qualification is a preliminary assessment based on self-reported information, while pre-approval is a more rigorous process involving thoroughly verifying your financial details. As a result, pre-approval is a more robust indicator of your ability to secure a mortgage and is often more appealing to sellers when making an offer on a home.
Please make sure you get a pre-approval rather than a pre-qualification letter to head of problems down the road.
What Are The Benefits of A Mortgage Pre-Approval Letter
Getting your approval before you start looking at home has some compelling benefits. Not only can it save you money, it will save you time and aggravation.
Be A Competitive Buyer
Home sellers want a mortgage pre-approval letter that inspires confidence. In a seller’s market, your offer needs to stand out.
The biggest reason real estate deals fall apart is the borrower has been denied a mortgage. A seller does not want to tie up his property with a buyer who can’t deliver on their mortgage financing.
When I look at a pre-approval letter representing a home seller, I want to see that income, assets, credit and employment have been verified. I will also ask for the ability to call the lender and discuss the financing.
The point is my seller needs to know the ability of a buyer to close on a home that is highly likely to be successful.
Leave nothing to chance with your mortgage pre-approval.
Prevents You From Looking At The Wrong-Priced Homes
For many buyers, a few hundred dollars in a monthly payment can make a difference. Often a buyer goes online, gets a rate, and makes decisions based on their calculations.
But that advertised rate is the best possible rate you can receive; please just read the fine print. The interest rate you will receive could be quite different. Rates are based on many factors…. down payment, credit profile, credit score, debt-to-income ratio, loan program, and property type.
Also, when home buyers try to “qualify” themselves to see how much mortgage they can afford, they do not understand the subtleties involved in qualification. Using overtime, bonuses and second jobs for income may or may not be allowed by a lender.
Do you want to spend weeks or even months looking at a house you can’t afford? Or find out you can afford way more house than you initially thought?
Don’t waste your time going blind.
Pinpoint A Housing Budget That Works For You
A mortgage pre-approval will hone in on a monthly mortgage payment down to a few dollars. You will know exactly how much a house will cost you.
No guessing, no surprises.
With real numbers, it is possible to put a budget together that you are comfortable with. Committing to a monthly payment for 30 years is a big deal and you want to know what you are getting into.
Give You Time To Tweak Or Fix Your Credit
Approximately every 20 points in credit score can benefit your ability to obtain a home loan. It could allow for higher debt-to-income ratio, a better interest rate, or a better loan program.
In perspective, an extra $50 a month in mortgage payments translates to $18,000 over 30 years. What could you do with $18,000? Take it a step further; invest that $50 monthly at 4% in 30 years, and you will have $35,034.
Little tweaks to your credit matter. While you are in the home-buying process, constantly work on putting your credit profile in a better position.
Credit Mistakes
First, banks make mistakes that affect your ability to buy a home. Twice in my life, a bank had made a mistake that made purchasing a home difficult.
It was utterly the bank’s fault, but it took weeks to have the chance to fix these problems. And it is easier to fix when you aren’t frantic and under the gun.
Credit Karma helps monitor your credit even before applying for a home loan.
Improve Credit
Sometimes, improving your credit, even 2 or 3 points, can put you in a better position. But maybe you can improve your credit even more. In a more extreme case, I had a client for whom we improved their credit score by 118 points in 45 days. That was a game changer for this home buyer.
Work with your lender. Sometimes, minor tweaks like paying down a credit card or two a few hundred dollars can significantly impact. But it needs time to take effect.
Shop Programs And Interest Rate
After getting an offer accepted for a home is not the time to shop for the best interest rate or a favorable loan program. You must worry about closing the loan promptly and not risking your deposit money you don’t have time to hesitate.
Getting your mortgage pre-approval before looking at homes allows you to explore options, ask questions, and find the right home loan.
Move Forward With Confidence
You can go ahead with your financing as soon as you can. You’ll clearly understand the monthly cost for each house you are considering pursuing.
Additionally, you won’t have to guess the required down payment and buyer closing costs; there won’t be any uncertainty about affording the house or qualifying for the loan.
By obtaining your mortgage approval early, no questions about financing a home will be left in your mind.
Avoid Chaos
If you have already gone through the pre-approval process to obtain a home loan, much of the work has already been done. When you get an offer accepted, a mortgage application has been filled out. Proper documentation has been submitted. Your file has been scrubbed for any pitfalls and you have had time to work them out.
By being prepared, you will have avoided a lot of rushing around and unnecessary chaos.
Putting The Cart Before The Horse
Unfortunately, many buyers start looking at homes before being pre-approved adequately for their home loan. Then, they fall in love with a house and submit an offer that is accepted.
Now, the fun begins. The loan process takes about 20-45 days. And you have deposit money at risk. Perform on the contract or potentially lose your deposit money.
Now the fun begins. By skipping getting pre-approved, you have to start from square one and go through the whole process on a very tight timeline. Often by going this route, you don’t have time to shop for the best mortgage and interest rate correctly. You may not have the time to fix small credit issues that will impact the rates and programs offered to you.
In the end it could cost you the house of your dreams, or paying more for your mortgage every month.
The Pre-Approval Process
The pre-approval process is relatively easy. If you have a pretty straightforward application, a pre-approval can be done in less than a day. Typically, it takes 24-28 hours. If your file is a little more complicated, it may take a few extra days.
- Find a bank or lender to issue your pre-approval letter.
- Fill out a mortgage application online, in person or over the phone. Be prepared to provide personal information.
- Submit documents that support what you stated for income and assets. Documents you will be asked for might include:
- 2 months’ worth of paycheck stubs
- 2 years W2’s or 1099’s
- 2 years of income statements
- All asset accounts, including savings, checking, and retirement accounts.
- The mortgage originator will pull a Tri-merge credit report.
- Your file will be lined up with the best program for you credit profile.
- A mortgage pre-approval letter will be issued.
After You Get Your Mortgage Pre-Approval Letter
To optimize the entire mortgage and home-buying process, there is some follow-up.
- Make sure you get a copy of your credit report.
- Ask your mortgage officer if there are little tweaks you can make to your credit that you could make to improve your interest rate or the availability of better loan programs.
- Make sure you get a loan worksheet spelling out all the details of the information used for your approval. This will give you solid information to work with from now on.
What Are The Banks Looking For?
There are three things the banks are looking for when they issue a pre-approval and the final commitment to lend.
- Credit– The “track record” of the borrower’s ability in handling credit. A Tri-Merge Credit report from the three major bureaus is condensed into a FICO score. The bank wants to know if you will repay the loan without issues.
- Collateral– Do you have the funds for a down payment, closing costs, and, in some cases, reserve funds?
- Capacity– The bank verifies you can make your monthly mortgage payment every month. This includes verifying your employment and income history. They look at your housing expenses and monthly debt to your monthly income. Your capacity is boiled down to your debt-to-income ratio.
Different mortgage programs spell out stringent guidelines but they all start with the three C’s, credit, collateral and capacity.
Common Misconceptions About A Mortgage Pre-Approval
The mortgage pre-approval process can be a source of confusion for many prospective homebuyers. Misconceptions can lead to unnecessary stress and potentially poor decision-making. To help clarify the process, let’s address some common misconceptions:
Pre-Approval Equals Guaranteed Loan Approval:
Misconception: Some believe that a pre-approval is a guarantee of loan approval.
Reality: A pre-approval is a conditional commitment based on your financial status at the time of application. Final loan approval depends on additional factors, including the property appraisal.
Pre-Approval Locks in Interest Rates Forever:
Misconception: People often think a pre-approval locks the interest rate indefinitely.
Reality: Pre-approval interest rate offers are valid for the date issued. Rates fluctuate daily. You are riding the daily rate fluctuations until you have a home under the agreement and lock your interest rate.
Pre-Approval Guarantees a Specific Loan Amount:
Misconception: Some assume that a pre-approval guarantees a specific loan amount.
Reality: Pre-approval states the maximum loan amount you qualify for based on your current financial situation. It can change if your financial circumstances change.
Pre-Approval and Pre-Qualification Are the Same:
Misconception: Many use the terms “pre-approval” and “pre-qualification” interchangeably.
Reality: Pre-approval involves a more rigorous evaluation of your finances, including a credit check and documentation review. Pre-qualification is a preliminary assessment based on self-reported information.
Pre-Approval Affects Credit Score Significantly:
Misconception: Some fear that getting pre-approved will significantly damage their credit score.
Reality: While pre-approval involves a credit inquiry, the impact is typically minimal and temporary. Multiple inquiries within a short period for the same purpose (e.g., mortgage shopping) are often treated as a single inquiry.
Pre-Approval Is a Lengthy Process:
Misconception: People may think obtaining a pre-approval is lengthy and complicated.
Reality: Pre-approval can often be completed relatively quickly, sometimes within a few days, especially if your financial documents are ready.
You Can’t Shop for Other Lenders After Pre-Approval:
Misconception: Some believe they must commit to the lender who issued the pre-approval.
Reality: You can continue to shop for mortgage rates and lenders even after receiving a pre-approval. It’s a good idea to compare offers to find the best terms for your needs.
Understanding these common misconceptions can help you navigate the mortgage pre-approval process more clearly and confidently. It’s very important to communicate with your lender and ask questions to ensure you clearly understand your pre-approval and what it involves.
How Long Is A Mortgage Pre-Approval Good For?
A mortgage pre-approval letter will have an expiration date. Most banks pre-approvals are good for 60-90 days.
It’s essential for you to know the expiration date on your pre-approval letter and plan your home search accordingly. Getting an updated pre-approval is simple and quick. It could be a quick phone call or updating some documents.
While an expired letter for just a couple of weeks doesn’t seem like a big deal to you, it is to the seller. They don’t know you, and if there are multiple offers, they aren’t going to give you the time to update your pre-approval letter.
What Are The Next Steps After Getting My Pre-Approval Letter?
Now that you have your pre-approval in hand let’s take a look at some of the next steps.
- Review- Once a loan officer finalizes your pre-approval, ensure you get a loan worksheet that will spell out all the details. Review the financials and if you have any questions, ask your REALTOR or mortgage officer to clarify.
- Budget- Now that you have actual numbers, assemble a housing budget and ensure you are comfortable with the numbers.
- Look at homes- Look at homes that fit your budgetary needs. With a proper pre-approval letter, you can move forward with confidence.
- Submit an offer- Once you find a home you like, submit an offer. And don’t forget to accompany the offer with your pre-approval letter.
- Finalize your mortgage application- Once the offer is accepted, finalize your application and documentation. Much of the heavy lifting is done because you took the time to get pre-approved early.
- Discuss if you should lock your rate- This is when to discuss a rate lock with your lender.
- Status Quo is the way to go- Make sure you make no changes to your credit profile when the application is submitted.
- Reviewed by underwriter- Your file will be submitted to an underwriter for a final loan commitment.
- Respond immediately to requests- The underwriter may have questions or require additional documentation. Make sure you respond promptly. Tim is of the essence.
- Final commitment issued- The underwriter will issue a final commitment when all conditions have been satisfied.
- Loan Disclosure- A closing disclosure will be sent to you spelling out all the financial details of your purchase. Please review it carefully with your REALTOR and mortgage originator.
- Closing Day- You just bought a home!
- Once a loan officer finalizes your pre-approval, ensure you get a loan worksheet that will spell out all the details. Review the financials and if you have any questions, ask your REALTOR or mortgage officer to clarify.
- Once a loan officer finalizes your pre-approval, ensure you get a loan worksheet that will spell out all the details. Review the financials and if you have any questions, ask your REALTOR or mortgage officer to clarify.
FAQs About Your Mortgage Pre-Approval
What is a mortgage pre-approval?
How is a pre-approval different from a pre-qualification?
Is a pre-approval a guarantee of a mortgage?
How long does a pre-approval last?
Can I shop for multiple lenders while pre-approved?
Does getting pre-approved hurt my credit score?
Can I make changes to my financial situation after pre-approval?
Conclusion
Getting a mortgage pre-approval is a highly essential step. The first thought of buying a home is when you should secure your pre-approval.
By obtaining it early, you can work with real numbers instead of guessing. This includes creating a budget for submitting an offer, allowing you to move forward confidently.
The benefits of getting your approval early will save you time, money, and aggravation. While it may seem like a silly piece of paper, your mortgage pre-approval has some clout behind it. Don’ skip this vital first step to buying a home.
Author Bio
Kevin Vitali is a Massachusetts REALTOR out of Haverhill MA that serves Essex County and Northern Middlesex County in Massachusetts. If you want to buy or sell a home, let me use my years of experience to get you the best possible outcome.
Feel free to contact me to discuss any upcoming moves. I am always happy to answer your questions
Call 978-360-0422 Email kevin@kevinvitali.com
