When shopping for a home, you're going to be asked at some point whether you've been "pre-approved" or whether you have mortgage "pre-approval." You're going to want to answer "yes" to these questions -- buyers who can are in a much better position to purchase a home. Why? Read on to find out.
In real estate lingo, to say you have been "pre-approved" or that you have mortgage "pre-approval" means you have a commitment in writing from a lender to lend you a specific amount to buy a home under certain conditions (e.g., length of the loan and interest rate). A pre-approval holds more weight than a loan pre-qualification, which is an estimate of how much you may be able to borrow.
It's important to have pre-approval for several reasons: It will let you know how much you can spend on a home and the size of mortgage you'll be able to obtain, it will give you an advantage when it comes time to bid on a property, and it will speed up the process when you find a home you want to buy.
When you have a pre-approval letter for a loan, you'll know exactly how much you can borrow, and possibly the length of the loan (15 years, 30 years, etc.) and your interest rate. This will give you an idea of how much you can spend on a home and what your monthly payments will be like should you purchase the property.
Buyers prefer sellers who have their financing in place. They don't want to choose a buyer who seems to be a qualified buyer, but can't come up with the funds to buy the house.
If you are pre-approved with a reputable lender, you may be able to win a bid over another buyer should multiple buyers be interested in a particular home -- even if the offers from the other buyers are higher.
When it comes time to place an offer on a home, having a pre-approval letter will speed up the process. That's because you won't have to wait to hear from a lender as to whether or not you've been approved.
You'll want to talk to a few lenders to search out loans that will best suit you and your financial situation. The lenders will require certain information, including: your income, your employment situation, how long you've been employed, and any debts you may have -- e.g., student loans, car loans and credit card debt -- and the source of your down payment.
You may be asked to show your tax returns, bank statements and W2 forms. The lender will use this information to determine the maximum loan you can qualify for and your monthly mortgage payment.
The lenders will also check your credit report and whether you have funds for a down payment and closing costs.
But, even when you do get pre-approved, remember that there are some caveats: Pre-approval letters can be time-sensitive and are subject to an appraisal on the home you're purchasing, so while a pre-approval gives you a firm idea of how much you may be able to borrow, it's still not a concrete guarantee that you'll get the loan.