How & Why You Should Get Pre-Approved for a Mortgage
If you are in the market for a new home, one of the most important things to do as you begin your search is to get pre-approved for a mortgage. A pre-approval letter from a lender not only will let you know exactly how much house you should be looking for, but it will make real estate agents and sellers take you more seriously as a buyer.
What is Pre-Approval?
Pre-approval is a written commitment that a lender gives a prospective borrower based on an initial review of the borrower’s credit, income, and other qualifications. This commitment specifies the loan amount for which the borrower would qualify. Most times, the loan and rate is locked down for a short period (typically 60-90 days).
Why Should You Get Pre-Approved?
There are several benefits to getting pre-approved. First, it will let you know the price range in which you should be looking. For example, if you know you are putting $50,000 down and your pre-approval is for up to $150,000, you know to focus your search on homes priced at $200,000 or under.
Another reason to get pre-approved is that many top real estate agents require a pre-approval letter before they will devote time and energy to helping you search for a home. Agents who are in high demand want to spend their time helping buyers who they know can buy.
Finally, a pre-approval letter is vital in a competitive real estate market where desirable homes receive multiple offers. Offers submitted with pre-approval letters are given preference, as sellers do not want to waste time with buyers who won’t close.
Documents You Will Need For Pre-Approval
Most lenders will want to review the following documents before issuing a pre-approval letter, so make sure you have them ready:
- Your last two years W-2’s
- If you are self-employed or a business owner, your last two years of business tax returns (all schedules), current balance sheet, profit and loss statement, and statement of cash flows
- Your last three months of bank statements, with your down payment money sourced
- All other asset statements, such as stocks, bonds, and retirement accounts
- Your landlord’s name and contact information, if you are currently renting
What If You Can’t Get Pre-Approved?
If your lender is unable to issue you a pre-approval letter, it will almost always be due to credit or income. If it’s credit, work on raising your score by correcting errors on your credit report and paying off collections and delinquent balances. If it’s your debt-to-income ratio, pay off or pay down your debt, and make sure you are applying for a loan amount that satisfies your lender’s qualifying ratios.
By getting pre-approved for a mortgage before you begin your home search, you can make your search much more productive from day one and when you find that perfect home, you can make a move on it with complete confidence!