Buying a house is one of the most important events in the lives of most Americans. This process requires a serious approach and a number of steps in order to succeed in this important question. Few people can afford to buy a house from their own funds or savings, so in order to secure the best chance for you to get your desired own corner, one of the best things you can do is get pre-approval for mortgage loan.
Not everyone knows what pre-approval is and why it is needed, but it is an important part of the process of buying a home, so in this guide we will take a closer look at what it is and how it works. If you are going to soon acquire a home, then for you this question will most certainly be relevant. Read on to find out everything you need.
What is a mortgage pre-approval loan?
Pre-approval for mortgage loan is a kind of promise of a lender to credit you a certain amount at a certain interest rate. After the creditor assesses your creditworthiness, your financial capabilities, your assets and property, the lender is confident that you will be able to make the necessary down payment and then be able to cover your mortgage payments every month. With such a promise of the lender you will be able to purchase the house you want up to a certain value.
Now it only remains for the creditor to make sure that your assets and property provide the lender with the security of his money. At this stage, you need to get an estimate of the home that you are going to buy. If the value of the house exceeds the amount of the loan you intend to receive, then your chances of getting pre-approval for mortgage loan are great.
At this time, the lender checks your financial situation, your income and scrupulously examines your credit report and credit history. You will also need to provide the lender with the documentation of your assets, the contract for the purchase of the house and the prior title, after you have already selected a particular home and made an offer to purchase.
In the case of a positive pre-approval, you will receive a letter from the lender approving that your loan will be endorsed. However, remember that, pre-approval for mortgage loan does not give 100% guarantee of approval the loan. Usually mortgage pre-approval has a limited duration of 2-3 months and can be canceled in case of any changes.
Why get pre-approval?
When you choose the house you want, to make an offer to buy it you will need to present the seller and your real estate agent a letter with pre-approval for a loan to make sure that you are more likely to be able to buy your chosen house. If a good home is offered at a good price, then you will be more likely to get a seller preference, having a pre-approval for mortgage loan from your lender.
Stages of applying for a mortgage loan
The first thing that your potential lender will carefully consider when reviewing your application for a mortgage loan is your credit report. If you are planning to buy a home in the near future, then check your credit rating and your credit report first. It is advisable to do this in advance so that you have time to raise your credit rating or correct errors in your credit report. You must do this before you apply for a pre-approval for mortgage loan, so as not to damage your credit, as well as to qualify for the best interest rates.
In the process of applying for a mortgage loan, you will need to provide your lender with all the necessary documents that relate to your assets, your income, as well as your personal information.
Information about the assets will allow your lender to see additional opportunities to ensure the return of their costs to issue you a mortgage loan. Your investment, the movement of money in your bank account, savings or gifts will be additional pros to you in the eyes of the lender, which will increase your chances of getting pre-approval for mortgage loan. Prepare all the documents that prove your assets.
Your regular income will be the main source of monthly mortgage repayment, so the lender will carefully explore it when considering your application. Prepare all the documents that confirm your regular income. Payment receipts and tax returns will be the most important of these documents, as well as any documents confirming additional income from any other sources.
Your personal information that a lender will need is your identity documents, such as a driver’s license or passport, as well as a social security number.
Pre-qualification for a mortgage loan will allow you to get an idea of what about the amount of the loan you can count on in the case of application and approval of its lenders. Pre-qualification does not guarantee you anything and does not even promise, because it passes like an interview with a lender about your finances. The lender will first assess your situation by comparing your income, expenses and assets. This is more like a consultation, although if you are interested in purchasing a home, then you should understand what you could count on.
Pre-approval for mortgage home loan
When you get pre-approval for mortgage loan, it will mean that you meet the requirements of the lender to get a mortgage, after the lender has carefully studied your financial affairs and creditworthiness. Now the lender will be able to make you a loan offer to which you are entitled. However, this is not yet the final statement of the mortgage, which today is handled by an automated underwriting system.
After reviewing all your data and documents that confirm your identity and your creditworthiness, your credit agent will submit your application to the underwriter and, thus, the lender will issue a credit commitment. This happens only after approval of you and the property that you intend to buy, that is, your future home.
In addition to approval, the underwriter may issue three more decisions on your application. If you do not fully meet the requirements of the lender, he can send you approval with the conditions, which will indicate the additional ones on which the transaction can take place. In the case when the creditor receives insufficient documents from you to make a decision, you will receive a suspension. In the worst case, you will receive a rejection of your application.
Get pre-approval for mortgage loan is a significant step towards your purchasing the house you want. If you reject your first application for a pre-approval for loan, you can try this a second time. Think about how you can improve your position to become a more attractive borrower in the eyes of the lender.
The difference between pre-approval and pre-qualification mortgages
Pre-approval of a mortgage is a more complicated process in which you will need to pay the lender a fee for obtaining a mortgage, as opposed to prequalification, which takes place simply as consultation with the lender without providing documents and detailed consideration by the lender, and without certain financial costs. You simply inform the lender in words about your affairs, on the basis of which he can answer you about the availability of a certain type of lending for you.
How soon can I start a mortgage search after pre-approval?
The process of pre-approval usually takes from one to three days, after which you receive a letter that serves as proof that the lender has already checked your assets and you can receive a loan from him for the necessary amount to purchase the selected home. If you receive a pre-approval for mortgage home loan in a letter, then you can use it for 2-3 months until it expires.
However, you should not forget that you can only apply for a mortgage from different lenders within 45 days, after which each subsequent application will be perceived as a separate hard inquiry of your credit report. This will adversely affect your credit rating, which in turn will reduce your chances of approval for mortgage loan.
Impact of credit score on prior approval process
To increase your chances of approving a mortgage loan, do not take any other loans as well as do not increase your total debt by opening new credit lines or by increasing your credit limit. Your ratio of income to debt should not exceed 30-40%, so as not to get a refusal. The higher your credit score, the better conditions and interest rates you can expect when applying for pre-approval for mortgage loan.
Why refuse to mortgage after receiving a pre-approval for mortgage home loan letters
Most often, creditors refuse after pre-approval due to some changes in your finances and in your information. If your credit score for any reason has decreased, even slightly, the lender may reconsider its preliminary decision. Keep track of your credit rating.
If you change jobs or change your assets or other data, this may also be a reason for the refusal. For lenders, the positive stability of borrowers is attractive, so keep this in mind and try to stick with it while you are in the process of buying a home. The creditor’s decision can also be affected by how you pay your bills. Always try to pay them on time, especially when you are going to buy a home.
Changes in the policy requirements for borrowers from the lender can influence lender’s decision. This is possible for various reasons, such as changes in the global or national economy or those ones in legislation, as well as internal changes in the company.
These are just some examples of the most common reasons for refusing loans, after receiving a pre-approval for a mortgage loan, because of which the lender may reject your application.
Should I try to get pre-approval through more than one lender?
You will have 45 days to try to get a pre-approval for mortgage loan from several different lenders at the same time without harming your credit rating. All requests made during this period will show only one hard request in your credit report. By applying for a pre-approval for mortgage loan to several lenders during this period, you can compare and select the most attractive and beneficial mortgage terms.
Get pre-approval for mortgage loan can help you make the purchase of the house you want, because the sellers give more preference to those buyers who have such approval before those who do not have. However, remember that the pre-approval is not yet a 100% guarantee, but only indicates that the lender has considered your financial capabilities and you are eligible to receive a mortgage at the time he considers your application.
Prepare well before applying for pre-approval for mortgage to get the best possible chances and more favorable conditions. Find out in advance about the status of your credit so that you have time to improve it and correct mistakes, and also prepare all the necessary documents.
If you need to reduce your debt, you can take a personal loan to consolidate your debt. So you bring closer the desired home purchase. To do this, you can use the application form on our website to get a preliminary decision from different lenders. Read our financial blog to know how to manage your personal finances and bring your dreams closer.