Source : Open Listings (This article originally appeared on OpenListings.)
https://www.openlistings.com/blog/how-to-apply-for-a-mortgage/
Step 3: Get pre-approved
Most first-time home buyers are confused about the pre-approval process. So, to clear things up, we answer “how to get pre-approved for a mortgage” and the 6 other common questions first-time home buyers ask about mortgage pre-approval:
- How do I get pre-approved for a mortgage?
- Gather Documents: Gather the necessary documents (as listed in step 1).
- Organize Documents: Create a Google Drive or Dropbox where you can organize all information in one, easily-accessible place.
- Contact a Lender: Call, go online or visit a loan office/bank. The loan officer will review your documents and give you a preliminary estimate of how much house you can afford, your monthly mortgage payments, and mortgage interest rate.
- Find out if you’ve been pre-approved: You will receive a pre-approval letter that secures your interest rates for the next 90-120 days (more on this below). On the other hand, your lender will notify you that you have not been pre-approved.
- Why get pre-approved for a mortgage?
Benefits of Pre-Approvals:
- Accurate: The best pre-approvals will give you an accurate idea of how much house you can afford. Furthermore, you’ll get an idea of your monthly mortgage payments and your short-term mortgage interest rates.
- Protection: When you apply for a mortgage pre-approval, there is usually a 90-120 day protection against rising rates. In other words, pre-approvals lock-in interest rates and allow you to search for a home without worrying about interest rates increasing significantly.
- Trustworthy: A pre-approved mortgage signals to sellers and real estate agents that you’re serious about buying a home.
- Advantage: A pre-approved mortgage may be the deciding factor between you getting a home over another home buyer.
- Free: Getting pre-approved for a mortgage is free, and there is no obligation to use the lender that pre-approved your mortgage.
- What is the difference between pre-qualification and pre-approval?
- Pre-qualification: During the pre-qualification stage of securing a mortgage, a lender will interview you to determine your income, expenses, and assets. The purpose of getting pre-qualified is to give you a rough estimate of how much house you can afford.
- Pre-approval: During the pre-approval stage of securing a mortgage a lender will look through your income, expenses, and asset more thoroughly. A pre-approval is a more concrete estimate of how much house you can afford.
- What if I don’t get pre-approved for a loan? Now what?
If you don’t get pre-approved for a loan, your lender can tell you why you were rejected. Lenders can also offer advice of how to get approved in the future.
For example, you may have to:
- Build Credit: If bad credit was the reason you aren’t pre-approved, then pay off your credit cards and try not to miss your debt payments for the next 6-12 months.
- Build Savings: Lenders usually want to see a significant amount of cash reserve in your savings account. Again, pay off your debts and try to save some money before applying for a pre-approval again.
- Build Income: If your lender says that you don’t make enough income for a certain loan amount, either try applying for a smaller loan or, if you’re married, ask for a joint-loan with your spouse.
- Build Employment History: Usually, lenders don’t like to see inconsistencies in employment history. Wait until you’ve been at the same job for two years before applying for a loan.
- Does pre-approval guarantee a loan?
Pre-approval does not guarantee a loan. It is only a review of your qualifications for how much you might be able to borrow.
A buyer receives their pre-approval letters, searches for their dream home within their pre-approved amount, has their offer and financial structure accepted by the sellers, and then submits their proposal to the lender.
The lender then reviews the proposal, the buyer’s finance details, and the details of the property. If everything goes smoothly (i.e., the home doesn’t look like a money pit), the buyer will be approved for a mortgage.
However, the pre-approval letter alone does not guarantee a mortgage.
- How long does it take to get pre-approved for a mortgage?
Depending on who you’re working with, you can get pre-approved for a mortgage in minutes. Sometimes all it takes is a phone call.
- What impact (if any) will this have on my credit?
The short answer here is that it depends.
As mentioned above, lenders will look at your credit score and history to determine if you’ll be pre-approved. These are called credit report inquiries.
First-time home buyers usually don’t have to worry about inquires damaging their credit score. However, the more inquires your credit history shows, the more it can damage your credit score.
Inquires hurt your score because it shows lenders that you could be doing something with your credit that puts you at risk.