If you’re looking to buy a new home, the first thing you should do is determine how much you can realistically afford. Before seeking out houses, condos, or apartments to view, you must determine your budget and have a solid understanding of what you can afford based on your current financial situation.
Obtaining a pre-approval letter is one way to best understand this. Seeking out a pre-approval letter allows you to see what lenders may be willing to offer you for a mortgage, and it is a simple way to set yourself apart from other homebuyers in a competitive market. Knowing what you can afford makes the buying and negotiation process much more straightforward, and it can help you make more attractive offers to sellers.
How is Pre-approval Determined?
The first step of obtaining a pre-approved letter is understanding what pre-approval is. Pre-approval is the process by which lenders determine how much they'd be willing to loan you for the purpose of buying a home. Lenders analyze the following factors to help determine the amount they can lend you as well as what they estimate your interest rate may be:
- Current income
- Credit score and history
- Assets and liabilities
- Employment history
These and other factors can be used to determine your total house-hunting budget and the monthly mortgage payment you can afford.
To acquire and verify this information, lenders may ask for a variety of different documents. It is wise to have the following documents on file to be provided in case a lender requests it:
- Bank statements for the past 60 days
- W-2 tax returns
- Asset account statements
- Driver’s license and additional proof of identity
- 30 days of pay stubs
Preparing beforehand and having these documents on hand will help the entire pre-approval process move more efficiently.
Pre-approval vs. Prequalification
Pre-approval and prequalification are sometimes used interchangeably, but they’re far from being the same thing. Prequalification looks at a general overview of your financial history and then provides you with an estimated loan amount that you’d qualify for. It shows you how much you can technically afford to spend on a house, but it does not hold any sort of weight when you’re making offers.
On the other hand, pre-approvals involve a hard credit check that looks at your credit score and history. This provides a more accurate depiction of what you can afford and shows lenders your history with repaying other loans. This also conveys more legitimacy and seriousness than prequalification, which can help as you begin making offers to sellers.
The Pre-approval Process
Pre-approval letters are typically only valid for 2-3 months, so be sure to plan accordingly when obtaining one. Within this time frame, a potential buyer will need to fill out a mortgage application. Within three business days of receiving this application, a lender is required to provide you with a loan estimate that states whether the mortgage has been pre-approved. The loan estimate will also include other helpful details, including:
- Loan amount
- Interest rate
- Terms and type of mortgage
- Payment estimations
- Closing cost estimations
- Any special loan features
If you are pre-approved, the file will be sent to a loan underwriter who will check and verify your documentation against your mortgage application. They will also ensure that you meet all the guidelines for the loan you’re applying for.
Finally, you will be presented with an official pre-approval letter. This will indicate to sellers that you are serious about purchasing a property. It also shows that you have the legitimate financial resources necessary to follow through with closing on a home. With a pre-approval letter in hand, you can be confident that you can have the means to finance your dream home.
Navigating this process can be tricky, and often it is best to have help from experienced agents. Theo Jordan and Katie Cassman have years of experience guiding buyers through the home buying process and can help you get pre-approved for your dream home now. Email
[email protected] or call 847-624-6236.
