Before the exciting process of house hunting can get underway, prospective homebuyers must be pre-approved for a mortgage.
Pre-approval provides a clear picture of what a borrower can afford and acts as a starting point to begin narrowing down affordable home buying options.
While pre-approval does not guarantee a loan, it does provide a conditional agreement that a mortgage loan will be granted by a lender. As an official status of eligibility, pre-approval encourages sellers to move forward with an offer, given the added assurance that a prospective buyer’s loan will be secured.
How to get mortgage preapproval
The pre-approval process involves a thorough examination of a potential borrower’s financial situation to determine their price range and mortgage loan options.
A borrower’s credit score, debt to income ratio and employment history are among the many factors that determine affordable loan options and pre-approval status. While this information may have been provided by the lender during pre-qualification, pre-approval is where this documentation is verified and deemed factual.
Difference between pre-approval & pre-qualification
Mortgage preapproval status is determined after the borrower has pre-qualified for a loan. Pre-qualification describes the lender’s ability to grant a loan based on the documentation submitted by the borrower. This documentation typically details the borrower’s financial status and is used to gauge the terms of the mortgage and what options the borrower can afford.
Pre-qualification provides all parties with an assurance that if a loan process moves forward, the borrower is creditworthy and can pay back the loan. While pre-qualification indicates that the loan process can continue, it does not provide definitive assurance that a loan will be pre-approved. Pre-approval can only be granted once the documentation submitted during pre-qualification is verified.
Benefits of pre-approval
Purchasing real estate can be a complicated process, requiring realistic expectations and a thorough understanding of the many factors that go into buying a home. For this reason, it is always best to begin the mortgage process with the help of a loan officer.
Prospective buyers sometimes make the mistake of researching home options prior to getting preapproval. With their heart set on a new property, these buyers will then file for a mortgage application, only to discover unexpected hurdles down the line that prevent the sale from going through. Meeting with a loan officer as the first step in the mortgage process will ensure that a borrower can explore home options with confidence and avoid costly and disappointing setbacks that could hinder a sale.
Starting over with a new buyer is a time-consuming and costly hurdle that home sellers and their real estate agents will always seek to avoid. A pre-approval letter indicates to sellers that a potential buyer is committed to buying a home and is motivated to complete the sale. The added assurance from a qualified lender shows that adverse events are unlikely, and the transaction can be expected to conclude free of unexpected hurdles.
Limitations of pre-approval
Pre-approval may provide a good idea of what a borrower and lender can expect during the home buying process, but it is good to keep at the forefront that it is not a guarantee that the sale will move forward without interruption. They are not meant to act as the final word of approval when applying for a mortgage.
Letters of pre-approval are often conditional and based on the borrower’s current financial standing. If a borrower was laid off from work, for example, their financial situation would no longer suit the terms of the previous agreement and their pre-approval status could be revoked.
Pre-approval allows prospective buyers to search for a home with a quality estimate that they can afford. This reassurance not only helps home buyers shop with confidence, but will also go a long way in avoiding potential interruptions to the sale down the line. Contact us if you are in the market to purchase a home so we can get your pre-approval underway.