Purchasing a home is an exciting milestone in one's life, but it can also be a complex and overwhelming process. One crucial step in the journey is securing a mortgage, and a pre-approval is an essential part of that process. A mortgage pre-approval offers numerous advantages, including a clear understanding of your budget and increased negotiating power when it comes time to write an offer on your dream home.
Let's take a few minutes and walk through the pre-approval process. Securing a pre-approval ensures you are well-prepared to embark on your home search and is the first step you should take in your journey!
Step 1: Gather Your Financial Documents
To initiate the pre-approval process, start by gathering the necessary financial documents.
These typically include:
Proof of income: Recent pay stubs, W-2 statements, and tax returns
Asset documentation: Bank statements, investment account statements, and records of any other assets you may have
Employment verification: Contact information for your current employer, including job title, length of employment, and salary details
Your lender may require additional documentation, of course, but gathering the above information will no doubt save you time when it comes to applying. If you are self-employed, be sure to have tax documentation showing your business income, etc. Typically, two years or more of self-employed income is necessary so be sure to ask your lender for specifics.
Step 2: Check Your Credit Score
Your credit score plays a crucial role in the mortgage pre-approval process, as it helps lenders assess your creditworthiness. Request a free copy of your credit report from one of the major credit bureaus (Experian, Equifax, or TransUnion) and review it carefully for any errors or discrepancies. If you spot any inaccuracies, take steps to correct them before proceeding.
Your lender will pull your credit once you officially apply, so catching errors ahead of time will save you headaches in the end. The better gauge you have on your credit, the better off you'll be in the long run regardless! A few lenders offer credit score updates each month to their members and is definitely worth asking your financial institution about.
Pay special attention to things like late payments or other debts when you look at your credit report. If you catch errors, contacting debtors, etc. is a simple step you can take to increase your score before even submitting your application.
Step 3: Research Lenders and Loan Options
Research different lenders and loan options to find the best fit for your needs. Consider factors such as interest rates, loan terms, and the lender's reputation for customer service. You can compare offers from multiple lenders to ensure you are getting the most favorable terms possible. As REALTORS®, we have a huge network of mortgage lenders we work with on a daily basis. Not all lenders are the same and not every lender is a perfect fit for you and your needs.
A huge recommendation we have, however, is that you work with a local lender. Online lenders offer a great deal of convenience, however, their terms may not always be what they appear. They typically have hidden costs even though they offer lower interest rates. If you're interested in working with an online lending company, check in with local lenders as well to ensure you're getting a mortgage that works for you!
Step 4: Contact a Lender and Complete the Application
Once you have chosen a lender, contact them to begin the pre-approval process. You can typically complete the application online, over the phone, or in person. Provide accurate and detailed information about your financial situation, employment history, and any outstanding debts or obligations.
Typically, when lenders have all of your information and are able to run your credit, they can show you different lending options. There are many different programs for securing a mortgage with benefits and drawbacks to each. Your lender may recommend a certain type of loan so be ready with questions you may have and don't hesitate to ask about different loan types, advantages to more money down, and more.
Step 5: Await the Pre-approval Decision
After submitting your application, the lender will review your information, including your credit report and financial documents. This evaluation process typically takes a few days, although it can vary depending on the lender. Once the lender completes their review, they will issue a pre-approval decision and give you a range you will need to stay in when home shopping.
A good lender will take their time with your application and consider many different aspects of your credit history, payment abilities, and more. Waiting a few days will totally be worth it in securing a loan that is best for your needs.
Step 6: Review the Pre-approval Letter
If your application is approved, your lender will provide you with a pre-approval letter. Keep this letter on file and be sure to give your agent a copy as soon as you start looking for a home. Having this in hand when you make an offer is an absolute must. It shows sellers that you are a serious buyer and have your ducks in a row. It makes your offer stronger and is required by most agencies to send to the selling agent with your offer or within a few days of an accepted offer.
Not all pre-approval letters detail specific details regarding your interest rate or loan amount cap. This is partially to ensure your privacy, so be sure you have a handle on the terms when speaking to your lender and share this information with your agent. Your agent will use this information to get you set up with your home search and ensure the properties you're looking through work for your budget without over-extending your monthly expenses.
Step 7: Utilize Your Pre-approval to Your Advantage
With your pre-approval letter in hand, you gain a significant advantage when house hunting. It helps you focus on properties within your budget and gives you a stronger negotiating position when making an offer. Sellers are more likely to consider offers from pre-approved buyers, as it signifies a higher likelihood of a smooth and successful transaction.
Knowing your budget also helps your REALTOR® set up alerts for you. We discussed in a previous email that many agents are able to set up automated emails based on your needs as soon as new listings come onto the market. Ask about this feature! It makes your search so much easier as you don't need to constantly scour listings every day!
Securing a mortgage pre-approval is a crucial step in the home-buying process, providing you with a clear understanding of your budget and enhancing your negotiating power. By following the steps outlined in this guide, you can navigate the pre-approval process with confidence and set yourself up for success. Remember, it's always beneficial to consult with a mortgage professional who can provide personalized guidance based on your specific circumstances. Happy house hunting!
Just because you've approved for a certain amount, be sure not to over-extend yourself! Check out our Mortgage Calculator and be sure you're comfortable with your monthly payment before you find your dream home.
Megan Kugler, mortgage lender with GreenState Credit Union in Waterloo, Iowa has even more details for you regarding the pre-approval process. Check out her video with Tad and learn just how stress-free a pre-approval can be!