Buying home is an exciting event. However, if you don’t have enough cash in hand, you will need to be approved for a loan which you never know how much you are going to get to begin with. In short, you need to be pre-approved for a mortgage loan. It is a process where you are basically promised a certain amount of money, depending on many factors, that would cover your purchase cost. How to do you prequalify for a loan, let us find out.
What Is Mortgage Pre-approval?
Pre-approval means determining your eligibility for a loan based on certain criteria. It is the way for the lender to know that you have the ability to make the needed down-payment as well as make monthly payments and pay off the loan eventually. At any point, the lender will determine the market value of the home and consider it as a collateral in relation to the offered amount. In essence, the home value should always be equal to or more than the loan you borrow for qualifying.
Mortgage Pre-approval Process
When a lender deems you qualified for a loan, you are getting the benefits that borrowing money can bring, such as easy access to fund, reasonable interest rate, protection to your personal assets and so on. You want to present yourself as having a solid foundation of trust and goodwill with other lenders like Chase bank, Capital One or Bank of America to help you successfully obtain the loan. How do you do this? The best way is through your online credit rating or credit score. Your lender will take time to go through your credit worthiness and offer the amount that seems appropriate for your situation. Will you be offered the entire purchase amount of the house? This, you will be determined only after complete review of your rating, which you will find out when you get the mortgage approval letter.
So, before getting approved, your lender will take a closer look at your income and other details. You are required to submit certain documents as needed by the lender, such as paystubs, purchase contract, asset documents, appraisal to name a few. The pre-approval doesn’t guarantee that you will be approved the loan promised and is usually valid for 2 to 3 months depending on the lender.
What is the Documents Needed For Pre-approval
The pre-approval folder contains all the necessary paperwork to sign a contract with the lender. Some of them include, but not limited to,
Paystubs: Be prepared to submit at least two years of W-2s or tax return documents, your recent paystub as well as other papers showing your additional sources of income, such as commission, bonus, income from other jobs, overtime, interest, dividend, social security income, retirement benefits, child support and alimony.
Other Assets: Your lender will request you to furnish information about other assets, such as real estate and investments, that you own. You may need to show your online bank statements including any gift letter that is applicable.
Personal Details: Your driver’s license or passport is required as a proof of your identity. In some cases, you may be required to present legal status documents as well.
As mentioned earlier, the getting approved for a loan takes anywhere from two weeks to more than two months depending on how quick you submit the details and how long it takes to process your application. Additionally, it is the underwritten part that will increase or decrease your chances of obtaining the mortgage. With automated underwritten process online which most lenders utilize, however, this time can be significantly reduced to days, even hours. Again, you can get pre approved from multiple lenders at the same time. Remember that even if you try to get pre approved from more than one lender, your credit agency will record it as a single hard inquiry due to the fact that you are buying a single home within a given time-frame. That time-frame is usually forty-five days.
Mortgage Approval Letter
Mortgage approval letter is the ultimate letter that you receive after going through the pre-approval process. This letter tells you the details of the process and the decision of the lender as to whether or not to approve the loan for you. It talks about the approval in length, why it made the decision and on what factors the decision is based on. However, to get to this point, you will have to pass three other qualifying stages of procuring loan – prequalification, pre-approval and commitment.
You prequalify for mortgage when the mortgage professional determines your eligibility for the loan prequalification informally. Prequalification is a general idea of what to expect when you formally submit your application. Pre-approval of mortgage happen when the lender gives attention to details and actually promises the loan with a specific interest rate that you are qualified for based on income, assets and other features. Commitment to this loan is absolutely necessary on your part once you are signing the documents.
Get Pre-approved for a Mortgage
So, is it a mandatory thing to get pre approved for a mortgage before you can buy a house or make a commitment to buying? Yes, if you can’t pay by cash. The seller or other people involved in the transaction will need this letter. Only through this document will you be taken seriously by them, especially in a competitive housing market. Once pre-approved, the letter is valid for up to 3 months.
If you are dealing with builders as sellers, you will be getting approved from the lending institution of the seller’s choice. In some cases, the seller may insist that you borrow from the lender of their choice. The best way to move forward is to calculate mortgage payment and make sure that you are getting the best interest rate possible in all circumstances. And above all, know your rights as a borrower. The more you shop around online for mortgage loan rates, the higher the chances of finding a good deal.