What’s the most important thing you can do before you start your home search? It’s not coming up with your list of non-negotiables (though that’s also important). It’s to get a mortgage preapproval. We’ll cover how (and why you should) get preapproved for a mortgage.
What’s a mortgage preapproval?
Preapproval is the process lenders undertake to determine how much you can borrow to purchase a new home. Lenders review your financial profile (including your income, savings, and debts) and to establish an informed estimate of how much you can afford to borrow.
Prequalification vs Preapproval
You may have heard the terms prequalification and preapproval used interchangeably, but the processes are different. They both help you understand how much home you can buy but that’s where the similarities end.
Prequalification is an informal review of a borrower’s finances. It’s a great first step if you’re not quite financially ready to buy a house but want to see where you stand. The prequalification relies on self-reported information on your income, assets, credit, and debt. Lenders will use that information to calculate an estimated loan amount, loan programs, and interest rates. Since the numbers are not verified, sellers and real estate agents aren’t as impressed.
In contrast, preapproval is a formal financial review. Borrowers will provide documentation like bank statements, pay stubs, and tax returns showing their financial history, current income and debts. Lenders will also review credit reports and verify employment. The lender will issue a preapproval letter outlining the amount you’ve been preapproved for, the loan program, and how long the letter is valid. Sellers and real estate agents prefer preapprovals because they mark you as a serious buyer.
Why is getting preapproved important?
Mortgage preapprovals signal to real estate agents and sellers that you’re a serious buyer that’s financially capable of buying a home. They also give you the confidence in knowing exactly how much you can afford before you start house hunting. Preapprovals set the top end of your budget so you can set your ideal range within that top amount.
When to get a preapproval
Since you never know when you’ll find a home you want to place an offer on, it’s a good idea to get preapproved as soon as you know you’re serious about buying a home. Being preapproved before you begin house hunting will ensure that you’re ready to put in an offer as soon as you find a home; which can be an advantage in a tight market.
Preapprovals tend to take one to three days to complete – though can take longer during busier seasons. You can speed up the process by having all your documents ready before applying.
Preapproval letters are typically valid for 60 to 90 days. The actual length will vary by lender so check with your broker. If your preapproval expires, your lender can renew it by rechecking your finances to verify there haven’t been any changes since your first application.
How to get preapproved
Here’s how you can prepare your finances before getting preapproved:
Get financially ready. If you know buying a home is on the horizon, now is a good time to make sure you’re financially prepared. The first step is to check your credit so you know where you stand before applying. You should have a credit score of at least 620. If necessary, take this time to pay down extra debt to improve your debt-to-income ratio.
Gather your financial documents and personal information. Your lender will want to take a deep dive into your finances and will be expecting information on your income and assets, credit history, debt-to-income ratio, and employment. To keep the process moving in a timely manner, you should get the following documentation ready for your lender to review: W-2 statements, pay stubs, and bank statements, personal identification, and social security number. If your down payment comes from other sources, like gifts or the sale of an asset, you’ll need to provide documentation for that as well.
Shop around. You don’t have to go with just one lender. Go through the preapproval process with a few different lenders. This way you can compare offers and choose the best loan package available. As long as you go through this process within a limited timeframe, your credit score won’t be affected.
The mortgage process tends to be a mystery to most homebuyers so the more you understand, the better prepared you can be. Once you’re ready to start looking for your new home, visit FCBHomes.com to learn more about our new home communities in Lodi and Riverbank.