The Pre-approval Game: Ins and Outs of Home Loan Pre-Approval

A home purchase is probably the biggest investment you will ever make. So you will certainly want to weigh your home loan options well before selecting a home. Obtaining a pre-approval letter from a lender is the ideal first step in getting a home loan. But first, it is essential that you understand the basic difference between getting pre-approved and being pre-qualified.

While you may be pre-qualified for a home loan, it does not mean that you have pre-approval. Pre-qualification is merely a basic financial review performed to determine whether you are eligible for a home loan. Pre-approval, unlike pre-qualification, is a more detailed review of your financial history, credit score, income, debt and other liabilities and goes one step further to accurately evaluate the amount of money that you can borrow. Pre-approval also involves filling out a mortgage application.

How to Get Pre-Approved

Below are the steps involved in getting pre-approved:

  1. Compare lenders and evaluate their loan programs.
  2. Choose a loan program that best suits your needs – consider factors including expected rise in income, other liabilities which may impede repayment, etc.
  3. Provide the following documents to the lender: W-2s and federal tax returns from the last two years, latest pay stub, bank statements from the last three months for all checking, saving and investment accounts and your completed loan application.
  4. Once the documents are processed, the lender gives a letter of pre-approval for a specific loan amount. Some lenders may also mention the interest rate at which the loan is offered.

If you are self-employed or own a corporation, the lender may ask you to produce other documents, such as profit and loss statements and recent corporate returns. If you are divorced, the lender may ask you for a copy of your divorce papers.

How soon you get a pre-approval will also depend on how quickly you are able to present these documents to the loan officer. You should note that the pre-approval letter is generally valid for a limited time period which may vary from between three and six months.

Why Get Pre-Approval?

While you can start hunting for a house without being pre-approved, experts believe that getting pre-approval is a wise option for the following reasons:

  • A pre-approval is an important signal to the seller about your readiness and ability to buy a home.
  • Being pre-approved is an indication that you already have the financial means to buy a house. It will put you in a better position when dealing with the sellers. Some real estate agents and sellers may not take you seriously if you are not pre-approved.
  • Pre-approval also helps you narrow your search down to affordable properties as you are aware of the maximum loan limit.
  • Pre-approval will quicken the remaining loan process if your offer is accepted.

Also, if you are looking at bank owned houses, otherwise known as REO properties, pre-approval gives you a leg up over other applicants. This is because a pre-approved loan is as good as a cash offer, and so banks, which own the properties, are more likely to choose applicants who have obtained a pre-approval letter over others who have not.

On the whole, a pre-approved loan can be very beneficial. It asserts your credibility as a buyer demonstrates your repayment capacity and thereby accelerates the process of buying a home.

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