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Loan
Pre-approval
Pre-approval
You wouldn’t want to foil your deal after all the tedious and painstaking
negotiation with the seller, because you didn’t get the loan. It
is a smart idea to get pre-approved for a mortgage loan before you start
shopping for a home.
Advantages of Pre-approval
Pre-approval gives you a multiple advantages in home buying process.
- Accurate answer to your home-buying budget question: How much money
can you afford to pay for a house? How much should you pay down? By
getting pre-approved, you can quickly, easily, and accurately answer
these questions.
- Negotiating edge and better price: If you are pre-approved, you are
more attractive to sellers, who need not worry that they’ll accept
your offer only to have your loan turned down. It is extremely useful
in a competitive market in which houses are selling fast. When you’re
competing against buyers who don’t have pre-approval, you are
the one most likely to win the deal. It also gives you additional negotiating
leverage to negotiate a sale price, if the seller cannot find other
pre-approved buyers.
- Time saver: If you are pre-approved, you'll save time to closing
when you find a home because the lender will have already completed
the necessary qualifying and underwriting steps. It can give you another
negotiating leverage if the seller is in a rush selling his house.
- Time to resolve any problem: If a problem crops up while you’re
getting pre-approved, you usually have time to fix it. Many lenders
and mortgage brokers are willing to review your credit and give advice
in how to solve the problems. However, if you wait until you’re
in the midst of a deal, the delay could cause you to lose the very home
you want most.
- Crucial for some less competent buyers: Although all home-buyers are
recommended to get pre-approved, first-time buyers, who do have no equity,
or self-employed people, who may be perceived as less stable than full-time
employees, are more likely to benefit from it. It is also very beneficial
for home-buyers who need to purchase a new house quickly once their
current one sells.
Pre-qualification vs. Pre-approval
Pre-approval and pre-qualification are two different things.
- Pre-qualification: The mortgage lender will do some quick calculations
on the computer using details you provide about your credit, income,
assets and debts to arrive at an estimate of how much mortgage you can
afford. The whole process may take only minutes or a few hours at most,
and is usually free.
- Pre-approval: The lender will review your credit history, verify
your assets and employment, and approve your loan before you find a
home to purchase. During this process, the lender does virtually all
the work associated with obtaining full-approval. Once pre-approved,
as long as the home appraises for at least the purchase price and your
employment and financial status has unchanged, the loan should close.
Getting pre-qualified is little more than receiving a statement of opinion.
Because your assets, income or credit is not verified, the lender is in
no way committed to anything. It can give you an idea of what you can
afford, but it hardly carries any weight with sellers or with agents.
On the other hand, the pre-approval process is more thorough and it gives
you a lot more negotiating clout than pre-qualification. It is much smarter
move to get pre-approved for a mortgage than just to get pre-qualified.
In spite of the difference between pre-approval and pre-qualification,
not all lenders apply the same definition to each expression. When meeting
with lenders, always ask how they define each term and what additional
steps will be required to obtain a loan.
What you should know when getting pre-approved
Pre-approval means that you are assured of a mortgage from that particular
lender. It may turn out that some other lender may offer better terms.
So many homebuyers get pre-approved more than once while shopping for
homes. If this is your case, be careful. Maybe it's not a very good idea
to get pre-approved at every mortgage Web site you visit. You may want
to have the pre-approval letter made out just before you make an offer.
Here is why.
- Multiple inquiries on your credit report over a month could hurt your
credit score. Every time you apply for a loan, the lender checks your
credit history, which shows up as inquiries on your credit report. Credit
score system will ignore all auto- or mortgage-related inquiries that
occur within a 30-day period, but continued inquiries over that period
may affect your credit score.
- There is often a time limit, typically around 30 days, on the pre-approval
letter. After that, it might be necessary to go through the process
again to verify that your financial status hasn’t changed.
How to get pre-approved
To become pre-approved, you'll need to work with a mortgage lender. Many
mortgage companies will help you become pre-approved at little or no cost.
Usually the lender doesn’t charge for writing the pre-approval letter.
All that cost you is a small fee for the credit report.
The mortgage lender will review your credit history, earnings information,
employment history and assets. To verify this information, you may need
to provide following documents to the lender.
- Recent paycheck stub
- Two years of income tax forms if you’re self-employed
- Verification of deposit from your bank showing that you have the
necessary down payment on account
- Verification of employment
After the review, the lender will give you a "pre-approval letter."
The pre-approval letter tells home sellers that you have the ability to
qualify for a certain mortgage amount.
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