Why Get Pre-Approved?
July 22, 2016 | By Sophia Barrett
We recommend all our buyers get pre-approved before beginning their home search. Knowing how much you can spend on a home reduces the potential frustration of looking at homes that may be out of reach. When it comes time to submit an offer on a home, being pre-approved for financing makes your offer more attractive to sellers in today’s competitive market. We want our buyers to be in the strongest position they can be as they begin their home search, and obtaining financial pre-approval is key to getting there.
What is Pre-Approval?
Before approving you for a home loan, a lender will need to qualify two things: You and the Home. The home you purchase will be qualified through an appraisal, which is an estimation of a property’s market value by a state-licensed appraiser. Once you choose a home to purchase, agree on terms with the seller, and enter escrow, your lender will get the home appraised to ensure the value of the home is consistent with your loan amount.
Lenders will also need to qualify you, the borrower, before approving you for a loan. While you can obtain loan approval after you’ve chosen a home to purchase, it is not a wise choice to wait until this phase of the home-buying process because you could end up not being approved for enough to purchase the home you’ve chosen. Instead, lenders can approve you for a home loan ahead of time in a process known as pre-approval. In order to do this, you will need to provide your lender with proof of income, proof of assets, employment verification, two years of tax returns, and other documentation. Your lender will review and verify these documents, run and review your credit, and will often call your employer to verify employment. Once you are pre-approved for a home loan, your lender will issue a pre-approval letter stating the dollar amount you are approved to borrow and any conditions of the loan. Pre-approval letters typically have expiration dates and the dollar amount is subject to review once a property is chosen and appraised.
Pre-Qualification vs. Pre-Approval
The pre-qualification process is a simple and informal one, in which, based on basic, non-verified information you provide, a lender gives you a rough estimate of how much you might be approved to borrow. Many borrowers get pre-qualified with a lender to get an idea of their budget before pursuing full pre-approval for a home loan. The pre-approval process is more formal and in-depth. To obtain pre-approval you will fill out a complete loan application and your lender will review your credit and verify your employment, income, and assets. Once you are pre-approved, you will receive a pre-approval letter indicating the amount you have been approved to borrow.