The first step in buying a property is getting a mortgage preapproved. Before considering your offer, most sellers will want proof of financing through a preapproval letter.
The good news is that getting preapproval takes little time or effort. In this article, we will discuss the importance of being preapproved for a mortgage and the steps you need to take to become preapproved.
What is a Mortgage Preapproval?
A mortgage preapproval letter is a conditional approval for a house loan from a lender. It indicates to sellers that, based on the information supplied in your preapproval application, you are likely to be accepted for a specific amount of finance. It is a huge selling point. Preapproval is not a guarantee that you will be granted a mortgage, and the conditions you are provided may alter after submitting a complete and official mortgage application.
To Acquire a Mortgage Preapproval, How Long Does It Typically Take?
The time it takes to be preapproved varies from lender to lender. Depending on your credit history, getting a simple preapproval might take anywhere from a few minutes to a week or more. Check with each potential lender to see how long their preapproval process takes, especially if time is of the essence.
Mortgage Preapproval vs. Prequalification
The degree of examination applied to your data is the primary differentiating factor. Income, employment, assets, etc., are not checked before issuing a prequalification. It presupposes that the data you entered is correct. However, the lender will only give preapproval once they have verified the information you provided.
Is Getting a Mortgage Preapproval Worth It?
There are many advantages to being preapproved for a mortgage. You’ll know how much you can borrow, directing your home search toward properties inside your price range. You should only feel obligated to borrow part of the amount for which you’ve been preapproved. As a general rule, you should only plan to borrow the full amount in unique circumstances. Why? Because many mortgage lenders base your loan amount on your gross monthly income rather than your net.
Lenders often don’t include items like food, electricity, child care, medical care, or entertainment costs as part of a borrower’s monthly budget. You are responsible for ensuring that the loan amount fits comfortably within your financial plan. If your lender tells you they can’t give you more money, go elsewhere.
You may sort out any problems that could prohibit you from acquiring a mortgage during the preapproval process before you fall in love with a particular home.
Finally, having your mortgage preapproval in hand might show sellers that you’re serious about purchasing their house and give you an edge over other buyers. Commission-based real estate brokers may appreciate knowing that investing in getting to know you might result in a sale. Moreover, it sends a message to potential mortgage lenders that you are a responsible consumer who knows what they’re doing.
Simply said, being preapproved for a mortgage shows sellers that you mean business.
Getting Your Mortgage Preapproved
The mortgage preapproval procedure is simple, requiring just a few days of documentation and verification from the lender to determine whether you qualify for a mortgage. Lenders’ preapproval procedures vary, but generally, they look at your income, assets, and obligations to determine whether they will lend to you – and, if so, how much.
Collect the Necessary Paperwork
Before issuing a preapproval, lenders will conduct a series of checks to validate your identification, credit, job, income, and assets. There is a standard form for home loans that you will be asked to fill out (often referred to as a “1003” or “ten-oh-three”).
Information about yourself, your finances, and any loans you’re interested in applying for may all be found on Form 1003.
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- Various financial assets such as bank accounts, retirement funds, and IRAs.
- What you have available in terms of assets.
- What you possess, in other words.
- Expenses and earnings data.
- Addresses and phone numbers for the workplace.
- Your financial obligations and debts.
Your lender will likely conduct a rigorous credit check and may ask for extra paperwork depending on your circumstances.
Compare Mortgage Rates from Many Institutions
Homebuyers, like anybody else, should shop around for the best mortgage rate possible.
The amount you owe monthly is heavily influenced by the lender’s policies and interest rates. You’ll be trapped with their terms if you apply with one lender and are preapproved. If you apply to various lenders and are preapproved, you have more options from which to choose. Bank of America, Better Mortgage, and Rocket Mortgage are just a few examples of the many lenders that provide preapproval applications.
Before deciding on a loan, it’s necessary to perform some research. There might be a significant knowledge and experience gap between the lender and the loan officer processing your mortgage application, so it’s essential to do your homework on both.
Once you have selected several lenders, you will give the information required to complete the preapproval application process. An underwriter may review your preapproval application to establish the maximum loan amount. You should enquire as to the status of your application to ensure that an underwriter has evaluated it before considering you completely preapproved.
Once the lender has received all the necessary paperwork, it will inform you within a few days whether you have been preapproved and for how much. However, suppose you have had a foreclosure, bankruptcy, an IRS lien, or have low credit. In that case, the preapproval procedure might take longer.
The mortgage application process allows a window of time during which several lender queries into your credit report will be combined into a single hard inquiry. As a rule, the window lasts for 14 days. However, it may be extended in some instances.
Getting several rate quotations within a 14-day window is recommended since it’s hard to predict which credit-scoring methodology a lender will employ.
Don’t Apply for Preapproval Too Early
Preapproval letters often state that their validity is for 30 to 90 days from the day they are issued. Given the tight timeline, preapproval letters are best obtained just before natural house hunting begins. A pre-approval, after all, is merely a conditional approval. The final mortgage approval might be refused if you incur additional debt, switch employment, or diminish your funds.
Determine a Financial Institution to Work With
Obtain formal loan estimates from your short list of lenders after you have made an offer on a home. The lender must provide this estimate by the third business day after receiving your mortgage application. Your estimated interest rate, monthly payment, closing expenses, taxes, and insurance premiums will all be shown in this document, along with other loan terms and conditions, including any applicable penalty fees. After comparing the quotes, you may decide which lender is the best fit for you and proceed with the application process with them.
Insight: Look at the map below to get a feel for mortgage rates in your area.
Local Mortgage Interest Rates
Variables such as location are considered when determining mortgage and refinancing interest rates. Check out Credit Karma’s mortgage rate marketplaces, mortgage refinancing rate marketplaces, and our most recent state-specific recommendations to get a better idea of the rates you may be eligible for.
What’s Next?
There are several advantages for house buyers who get preapproved for a mortgage.
Without preapproval, you may begin fixing the problems. This might involve reducing your overall debt load, saving up for a more significant down payment, or disputing errors on your credit reports. You will find out during the preapproval process if there is a problem, giving you time to fix it before you start looking at houses. If you do this, you can avoid being in for a rude awakening after making an offer on the house.
You may set yourself apart from other homebuyers by demonstrating initiative and professionalism by obtaining a mortgage preapproval letter before beginning your search.
Featured Image: Pexels © Andrea Piacquadio
