What is pre-approval and why does it matter?
Even before you've found your future home, you should consider should obtaining a mortgage pre-approval. Getting this done early can be a game-changer in the homebuying process. A preapproval letter letter from a lender indicates to sellers and realtors that a lender has evaluated your finances and are tentatively willing to lend to you. A preapproval shows sellers that you are serious and can set you apart from other buyers.
Getting a preapproval demonstrates your clear understanding of your budget and readiness to invest in a new home. It also assures sellers that you've consulted with a lender and have a solid idea of the loan amount you'll likely be approved for.
How to get pre-approved
To get pre-approved, start by completing an online application or speaking to a loan officer. Many lenders offer user-friendly online mortgage applications now that streamline the process. Others may take a hands-on approach with a dedicated loan officer who will be with you the entire part of a mortgage journey.
You don't need to have found a home yet, instead the focus of this process is gathering accurate information about your financial background. After submitting your application, the lender may perform a comprehensive check using the provided documentation.
Remember, pre-approvals have an expiration date, typically lasting between 60 to 90 days. To protect against rate increases during this time, you should ask the lender about rate locks while you're shopping. Rate locks can provide peace of mind for a specific period, ensuring you secure a favorable mortgage rate, but they may come at a cost.
The pre-approval checklist
Before you start searching for your dream home, gather the necessary documents for pre-approval. Here's a checklist of what you'll need:
- Tax returns
- Copies of W-2s (or 1099s for independent contractors, freelancers, and the self-employed)
- Payroll stubs
- Bank statements
- Loan obligations (such as student loans, auto loans, and credit cards)
Pre-qualification vs. pre-approval: Know the Difference
It's important to understand the difference between pre-qualification and pre-approval. Pre-qualification is a quick assessment of your debt, income, and assets to estimate how much you may be approved for. However, pre-qualification lacks the depth of a pre-approval. It doesn't involve a credit report analysis, an in-depth evaluation of your ability to buy a home, or detailed underwriting. A pre-qualification can still be a helpful exercise to help you get a sense of your relative homebuying power.
Pre-approval sets you apart from other buyers, giving you the edge you need in a competitive market. So gather your documents, find a reputable lender, and take the first step toward finding your dream home.