Whether you have reached the point in your life where you are ready to start looking for your first home or you are an experienced homeowner, this is an exciting time. Jumping online to start scanning through for-sale listings in the areas you are interested in is a convenient first step for everyone. However, before you get your heart set on any particular property, and in order to first determine whether or not this property is even in your price range, it is useful to undergo mortgage preapproval. The mortgage preapproval process can save you a lot of time and potential disappointment early in the home searching process, but it also gives sellers an indication of the legitimacy of the offers that they receive. So, let us look at what exactly a mortgage preapproval letter is and how to get preapproved for a mortgage.
What Is the Difference Between Prequalification and Preapproval?
While both of these can be steps in the mortgage process, prequalification is not necessarily required. Prequalification is a preliminary, high-level evaluation of your financial ability to afford a home at a specified price by examining key personal and financial information of the borrower. A pre-approval home loan carries much more credibility as it is a much more thorough evaluation of a potential homebuyer’s financials.
Why Should You Get Preapproved?
Most people that enter the market may not really understand what financial responsibility it is to be a homeowner. Some people may want to know how expensive of a home they can afford to buy. Be that as it may, anyone looking to purchase a home should get preapproved first, before starting their search. In general, a mortgage preapproval is an in-depth assessment of your finances and determination of ability to repay a mortgage of a specified amount. In order to get preapproved, you will need to disclose your annual income, credit and debt amounts, and any other assets that you own to the lender. From there, the lender will be able to make a calculated assessment on whether you should be considered for approval for an official mortgage.
Some may think that this is just a ballpark on the lender’s end of things but, in fact, a preapproval letter is essentially an offer from the lender or bank for a set loan amount under specific terms. Keep in mind, however, that a preapproval letter does not guarantee anything with regards to the mortgage, but it is a positive step in the process of securing a mortgage eventually and being able to purchase the home you want.
Two Key Aspects
- Never contact just one mortgage lender when going through the preapproval process. Different lenders have different guidelines and requirements and rates are going to vary from lender to lender. “Shopping around” a few lenders is a good approach. Getting help from a mortgage broker is a great way to go about this, as brokers’ line of work is to be well acquainted with the best lending options. These financial intermediaries work on behalf of the borrower to find the lenders with the best rates.
- Most, if not all sellers now, will not accept any offers (unless all cash) without preapproval letters in hand. This gives them the understanding that the offer for the home purchase is legitimate and backed by a lender. Wasted time can be avoided upfront because a preapproval letter shows that the buyer has been financially vetted.
The Preapproval Process
When you begin the mortgage preapproval process, the lender will dive into your current and past credit and debt history to determine your ability to afford and repay the loan. Before you start looking for lenders, there is some general information that all lenders will require you to provide, so save yourself some time and be sure that you have the following in order:
- Credit score and history – if you do not know what your credit score is or what it represents, listen up. Your credit score is a number that is based on various factors of your credit history and the higher your credit score is, the better. Your score is influenced by your payment history (loans and other debt), the amount of debt you currently have, the age of your credit accounts, the variety of credit accounts, and how many new credit inquiries you have over a specific time. With all these factors taken into consideration, a credit score will be calculated that will allow lenders to make a judgment on your credibility to repay the loan that they may offer you. When it comes to mortgages, one of the most important factors is the interest rate that is charged. Borrowers with higher credit scores will qualify for lower interest rates on the mortgage. A good starting credit score of at least 620 points is typically suggested prior to considering looking for a mortgage. Some lenders may approve borrowers with lower credit scores, but they will come with higher interest rates on the mortgage. For most individuals, the home buying process needs to be a well-prepared decision and you should start working on your credit profile in the months and even years leading up to the time when you want to purchase a new home. Ideally, a credit score over 740 points allows borrowers to secure the lowest mortgage rates from lenders.
- Necessary Documents – Prepare and collect all the documents that you need to submit with the lender for your application. For you and the co-borrower (if there is one) there are several documents necessary that include pay stubs and W-2 tax returns (typically, previous two years), bank and investment account statements. Consistent employment history as well as adequate income are required by lenders for the mortgage amount to be preapproved because they want to know that you will have steady income to make the mortgage payments. As for your bank and investment accounts, the lender needs proof that you have the ability to pay for the closing costs (most lenders will require 20% down payment or private mortgage insurance to cover down payments that are less than 20%). Aside from these documents, you will also need to provide your Social Security number(s) and a list of previous addresses that you have lived at.
Once all the financial information has been gathered, you should begin “shopping” around different lenders or find a mortgage broker to work with. After submitting your application for the preapproval, the lender will examine and determine whether or not to preapprove you for the mortgage that you are seeking. The end goal (if all goes right) is to have a letter that states a specified amount (and quoted interest rate) for a mortgage that a lender is willing to loan in order for you to put an offer on your dream home.
Hopefully, now you have a baseline understanding of what it means to get preapproved for a mortgage, why it is important, and what steps are needed to go about securing a preapproval letter. When you reach this step in the home buying process and you are ready to start looking for your dream home within your mortgage budget, contact us at Jeff Barchi. As one of the best real estate agents in Paradise Valley, we have been helping individuals like yourself for more than 20 years with this process and are here to help you too. Whether you are searching for a family home in Phoenix or an upgrade in Scottsdale, no one knows the Phoenix metro real estate market better. Contact us today to get one step closer to finding your next home.