Pre-Approvals Vs Prequalifying
Pre-qualification, which is where the lender checks your credit and talks with you about your goals and objectives, is considered the first step in the mortgage process. Pre-approval, on the other hand, requires verification of your tax returns and pay stubs. In reality, the terms are often interchangeable. The Consumer Finance Protection Bureau says that pre-approval and Pre-qualification are often interchangeable. Different lenders might have different definitions of each.
Which One Do You Need?
It is important to have sellers feel confident in accepting your offer. Make sure you fully understand your offer and talk to your agent to find out which one is most credible in your area.
No matter what the title of your lender's letter is, it will state that they are willing to lend you a certain amount of money. Pre-approval or pre-qualification are not guaranteed that you will get a loan. This is not an offer to lend, a promise to make a loan, or a guarantee about specific rates or terms. Before extending a loan, the lender might require additional documentation. For example, an appraisal of your home may be required by the lender.
This means that even though you have the letter of pre-approval, it is not the right time to buy a car, quit your job, or accumulate credit card debt. Once you apply for a mortgage loan, any major changes in your finances or debt load will likely be noticed. Lenders don't commit. On the other hand, you are not. Many buyers believe that once they get a pre-approval letter, they must use the lender. It's not true.
Pre-Approval Is Crucial
You may think that pre-approval is best done when you are ready to purchase the home. Pre-approval letters can be obtained at the start of your home search.
First, you'll be able to know in advance what type of loan you'll be approved for. This can help you set your price range. Multiple lenders can pre-approve you. You don't have an obligation to get a loan from all lenders, even if they haven't committed fully to you. You can still get your loan elsewhere, even if the offer letter is used as part of the deal. Compare rates and lenders using the pre-approval process. Don't be concerned about multiple credit checks affecting your credit score. All mortgage inquiries are considered one pull within a two-week period.
You'll also be able to move quickly. Pre-approval letters can be used for a limited time. Usually, they last between 60 and 90 days. Pre-approval can be a great way to get your offer in as soon as possible. You won't need to wait for the lender to send you a pre-approval letter.
Everyone, real estate agents and sellers, will see that you are serious by pre-approving your application. This is especially important in a highly competitive market. Let's suppose you find a home that you like and make an offer. Another person makes an offer for the same house, but they have been pre-approved. Guess which offer is most likely to be accepted. Sellers may not even want to look at your offer in a hot market until they are pre-approved. Bank-owned properties require you to submit a preapproval letter before you can accept your offer.
Documents You Will Need
You will need the following documents to be pre-approved:
Your W-2 for the last two years
The pay stubs from the last three months
The tax returns for the last two years
The past three months of statements from your savings or checking bank (this will most likely include your down payment funds).
Statements of all assets (stocks and bonds, retirement accounts, etc.) for the past two months
If you're renting, the name and number of your landlord or current mortgage documents.
Your divorce decree, if applicable.
If you are self-employed, your business tax returns for two years as well as your year-to-date profit-and-loss statement and balance sheet.
Permission to pull your credit report. Many lenders will charge $30 to pull your credit report.
It doesn't matter if you wait until you have all the documentation before you can use the tool. You may not require all the documentation depending on your situation and your credit score, but it is helpful to know what you will need. After you have provided all the documentation required, a pre approval letter should arrive within 24 to 48 hours.
If You Can’t Get Pre-Approved?
You can improve your credit score and pay off your debts—Correct any errors in your credit score. Ask your lender about the problem and make plans to fix it.
