The Mortgage Pre-Approval Process

May 11, 2011

Real estate agents typically like their agents to be pre-approved for a mortgage loan before they start the buying process. Most first time home buyers and even some repeat buyers don’t really understand the process. So how does the mortgage pre-approval process really work? Your agent is giving you good advice. Getting pre-approved for a loan before you start house hunting is always a good idea, and for several
• It will help you limit your search to homes that are within your price range.
• The pre-approval process will identify any qualifying obstacles you have, such as low debt to equity ratios or potentially credit that is not up to par. It doesn’t make sense looking for a home if you can’t even get a mortgage loan. Being pre-approved can help you spot these potential issues early on, so you can work on them.
• Sellers will take you more seriously. When you make an offer on a home, one of the first questions the sellers (and their agents) will ask is: “Have the buyers been pre-approved for a loan?”
These are just some of the benefits of the pre-approval process.
Lets now talk about how it works. The mortgage pre-approval process is actually quite straightforward. You would first contact a lender, if you don’t have a lender your real estate agent can help you out with one or can recommend a few. You would then tell the lender you want to get pre-approved for a mortgage loan. You can do this over the phone, or you can do it through the lender’s website. Most banks have online pre-approval processes.
Pre-Approval by the Numbers
Home buyers should prepare for the pre-approval process early on, before they even start talking to lenders.
1. First, make sure you’re ready to take on a mortgage payment. If you haven’t done so already, determine how much you can afford to spend monthly. It’s important to do this before you get pre-approved for a mortgage as we have seen in the past that home buyers sometimes get pre approved for a loan well beyond their means.
2. Get your financial documents together. You’ll probably have to submit W-2 tax statements for the last couple of years, income verification such as pay stubs, bank balances for the last six months, and other financial info. The lender should give you a list of documents you need to bring for the mortgage pre-approval process.
3. Once you have a budget and a monthly spending limit in mind, you can start contacting lenders. You can also use the Internet to get online quotes from lenders.
4. The lender will then take a look at your financial documents, check your credit score, and look at your debt to equity ratios. Eventually, they will tell you whether or not you qualify for a loan and if so, how much.
5. The lender will also provide you with a pre-approval letter that includes this information. This letter can be helpful when negotiating with sellers, because it makes them more confident in your ability to pay for the home. This is helpful in a competitive market, where sellers get competing offers from buyers.
Here are a few other things you should know about this process. Your pre-approval will probably have a time limit. In most cases, it will be relevant or good for 30 or 60 days. With that being said, the pre-approval is not set in stone just a good benchmark to start searching homes with. Your pre approval letter does not guarantee that you’ll get a loan for that amount. It’s just a way for the bank to say how much they will probably lend you, when you are ready to purchase or write a purchase agreement. Once you have written your purchase agreement you will still need to get a final approval once you find a house and make an offer.