What is a pre-approved mortgage loan?
Obtaining a pre-approved mortgage loan can simplify the home buying process. Home buyers can have the mortgage company pre-approve them for a loan before they actually find a home they want to purchase. The mortgage company will approve the borrower’s credit for a specific amount. This allows borrowers to know in advance how much they can afford to spend when buying a home.
Qualifications
Lenders consider many factors when pre-approving a mortgage loan. They will consider the borrower’s income-to-debt ratio to determine if they can afford the monthly payments. Assets are also considered as a factor to decide if the buyer can afford the purchase price of a home. The lender will check the borrower’s credit to see if there is any problem with the payment history on other loans. This includes late payments, missed payments, repossessions, and previous home foreclosures. Home buyers who have a history of bad credit may not be able to be pre-approved for a mortgage loan. The financial institution will also look at the value of the property. If the home’s value is not appraised high enough, they may not want to extend credit for the purchase.
Process
To obtain a pre-approved mortgage loan, the borrower must complete a pre-approval application. Important documentation should be gathered when completing the application such as recent income tax returns, pay stubs, bank account information, divorce decrees, documentation of any self-employment or other income, and a list of monthly expenses. It may be a good idea before applying for the pre-approval to obtain a free credit report This way, the borrower can get some idea of whether there is a chance for an approval by the lender. Scores above 700 are considered excellent credit. However, a score below this will not necessarily disqualify a borrower from pre-approval as there are several other factors taken into consideration.
When considering obtaining a pre-approval for a mortgage loan, home buyers should check with several lenders to find out who has the best rates available. Some applications can be completed online on the lender’s website while others will require the borrower to visit the office to fill out an application. When completing an application online, additional documentation may have to be faxed, mailed, or hand-delivered to the lender.
Pre-approval letter
A pre-approval letter can be used during the house hunting process. This makes it easier to purchase a home as many real estate agents are eager to work with buyers who have a pre-approval letter. Sellers will know buyers who have taken the time to obtain a pre-approval letter are serious about purchasing a home. When buyers obtain a pre-approval letter, they should keep a close eye on the expiration date. Pre-approval letters are typically only good for ninety days. When the approval letter is close to expiring and buyers have not yet found a home they would like to buy, they may seek a to have their approval letter re-validated.
What are the advantages?
A big advantage to being pre-approved is that it gives the buyer more leverage when negotiating to buy a home. Real estate brokers will be more willing to negotiate on price if the buyer has already been approved. Being pre-approved will also save the borrower time when being shown listings. If buyers know what amount they can afford to spend on a home, they can have the real estate agent only show them homes within that price range. The real estate agent will also work with buyers who have gained pre-approval to speed up the closing process. If the agent knows the buyer is already pre-approved, once a home is selected, he can proceed with ordering an appraisal or any other inspections that have to be completed before closing.
Precautions
Being pre-approved does not guarantee the borrower a mortgage loan. Many lenders have a secondary or final approval process after the borrower is initially approved for a loan. Often, final approval does not happen until the financial institution has verified all the information provided in the application and received a property appraisal and title report for the property to be purchased. Most lenders go through a three-stage process in the approval process; pre-qualification, pre-approval, and final approval. Also, check with the lender about the fees for pre-approval. Some are free, but other lenders can charge as much as $300 to $400 to pre-approve a mortgage loan.
Before obtaining a pre-approval, home buyers should make sure they have enough money to cover any down payment and closing cost requirements. Minimum down payments are generally around five percent of the purchase price while closing costs can be anywhere from two to three percent of the total loan amount. Closing costs cover such fees as processing fees, title insurance, recording fees, application fees, and brokerage commission among various other costs.
