You decided to buy a home, congratulations! Now you have a lot of work ahead of you. In fact, before you set out to find your dream home, you should go through the pre-approval process. Even if you are in the planning stages of buying a home, you should speak with a mortgage professional to see where you stand. You gain valuable insight into your financial situation when you speak to the professionals who will handle one of the larger investments in your life. This process can save you headaches and even heartache if you learn early on that you cannot afford a specific price range. This prevents you from falling in love with a home before securing approval.
The Timeline
Generally speaking, you can start the pre-approval process 6 months prior to the time you see yourself moving. This may sound like a long time, but in mortgage terms, it’s not. The typical purchase closing process takes anywhere from 60-90 days; this could equal almost half of the time of the 6-month timeline. If you factor in the time you need to shop for the right home, win the bid, and secure a contract, the six months goes fast. Every lender differs in how long their pre-approval lasts, but many allow up to 6 months as long as none of your qualifying factors change during that time.
Helps When You Shop
Shopping for a home requires many factors. Sellers want to deal with serious buyers. Many realtors don’t even accept views on a home unless the buyer has a pre-approval letter. This keeps “nosy” neighbors and non-serious buyers out of the seller’s home. Selling a home is stressful enough – the seller doesn’t need to deal with wasting time on people who don’t have any interest in purchasing the home. Even if you had an interest, but could not secure financing, it is a waste of time for the seller. Having that pre-approval letter in your hand paves the way for many home viewings and could lead you to your dream home.
Get the Competitive Edge
If you end up in a situation where another buyer is in a bidding war with you on a home, you could have a leg up on him or her if you have a pre-approval letter. Many buyers don’t waste their time getting approved beforehand. They figure their credit and income are good enough to secure an approval. In the eyes of the seller, though, this is not good enough. The seller doesn’t know you from a stranger on the street. They don’t know whether you can afford the home or not. Now, if you have the pre-approval letter in your hand, the seller has the bank’s approval that you can afford the home. The seller is then more likely to take your bid over the buyer without the pre-approval.
What the Pre-Approval Process Entails
Now that you know you can start the pre-approval process up to 6 months before you wish to move, here is what you can expect:
- The lender will pull your credit. They need to see your credit score as well as your credit history. This helps them to determine your credit risk and the type of program you are eligible to receive. For example, conforming loans have stricter credit guidelines than FHA loans. If your credit is “average,” you may be better off with an FHA loan.
- You will need to provide proof of your income. This may include your last 2 paystubs, W-2s for the last 2 years, tax returns for last year (possibly 2), and your last 2 bank statements. These documents help the lender see the income you make and the assets you have. They cannot just take your word for it. Besides, they may calculate your income a little differently than you do depending on the type of income you make.
- The lender will go over all of your documents and provide you with a pre-approval letter. This is the letter you can use to help you shop for a home.
What the Pre-Approval is Not
You should understand that a pre-approval is not a guaranteed approval. It is a conditional approval based on the information you provided. The underwriter still has to conduct his evaluation of your loan, but cannot do so until you have a signed contract. The underwriter looks at the entire picture, including:
- Credit score/history
- Income
- Assets
- Value of the home
- Amount you borrow compared to the value of the home
The underwriter then goes through your documents with a fine-toothed comb. He looks at not only your qualifying factors, but also items which pertain to the house. Aside from the appraisal to confirm the value, the lender must confirm that the home has a clear title, meaning there are no liens on the property.
If something pops up down the road that pertains to the property or your income does not quite add up, your pre-approval may not turn into an approval. This is why it is a good idea to get everything in order as early as possible. This allows you to deal with any delays or issues without completely disrupting the home purchase process.
Starting the pre-approval process early allows you to get a good idea of what you can afford. Maybe you thought you could afford so much more and are surprised at the number your loan officer brings back to you. On the other hand, you might be pleasantly surprised to find out how much you can afford. Either way, securing the approval early, enables you to make changes and figure out how to proceed with the information you were provided. If you wait until the last minute, you could be unpleasantly surprised to find out you don’t qualify for the loan you thought you would have no problem securing. It only takes a little extra time to obtain that pre-approval letter that can pave the way to future home ownership much faster than any other process can help you.
