Now that you have decided to buy a new house…let the fun begin.
Yes, that was said with a bit of sarcasm because buying a house is fun and exciting, but it can, at times, be a rollercoaster ride that never seems to end. However, being proactive when it comes to the mortgage loan process will make your home buying experience so much better and stress-free, well, almost stress-free.
Wait…what?
I thought the mortgage loan process was a nightmare?
It can be, depending on your situation and how prepared you are before actually shopping for and buying a home. Looking for a home and finding a new home is the easy part. After that, how quickly and easily the home buying process progresses is completely up to you.
Would you like to know how to sail through the mortgage loan approval process with flying colors?
Then keep reading…
The One Thing That Will Bolster Your Chances of Getting a Home?
There is one thing that will bolster your chances of getting a home more than anything else.
Do you know what that is?
A mortgage pre-approval letter. Not a pre-qualification letter, but a pre-approval letter. Yes, a pre-qualification letter is helpful, but a pre-approval letter holds so much more weight than a pre-qualification letter does. Therefore, a pre-approval letter is something you should seriously consider getting BEFORE you start looking for a home. We’ll talk about why in a moment.
But first, let’s talk about the differences between a pre-qualification letter and a pre-approval letter because the differences are significant. Additionally, having one over the other means different things.
Are you ready?
Then sit down and relax because your life is about to change very quickly and in a big way. But don’t worry, because we are here to help you through the entire home buying process every step of the way!
What Is the Difference Between a Pre-Qualification Letter and a Pre-Approval Letter?
Most real estate agents will tell their clients they should get a pre-approval letter to help their chances of successfully buying a home. However, what many people don’t realize is that there is a big difference between a pre-qualification letter and a pre-approval letter. In fact, many people frequently interchange the two terms without realizing they are actually two different things that have two very different purposes.
So exactly what is the difference between a pre-qualification letter and a pre-approval letter?
➣ Pre-Qualification Letter
A pre-qualification letter is when a home buyer submits their information to a lender without proof or documentation of that information and the lender gives that home buyer a preliminary approval based on the information the lender received. This preliminary approval is provided to the home buyer without the lender performing any actual research into the home buyers financial status, etc. There is usually no cost to obtaining a pre-qualification letter from a lender. And, oftentimes, the lender pre-qualification can be done online or over the phone.
Here is what is needed to obtain a pre-qualification letter.
- Providing the lender with a summary of your overall financial situation.
- A list of your combined household debts.
- Your combined household income.
- Any combined assets you might have.
- And any other information the lender might request.
Here is what is not required for a pre-qualification letter:
- No mortgage application.
- No application fee.
- No credit check.
- No formal financial review.
- No down payment estimate amount.
- No specific loan amount is given to the buyer (just a ballpark figure).
- No interest rate information is provided to the buyer at this time.
The lender will take the information and provide the home buyer with an estimate of about how much they might be able to borrow based on the information the home buyer has given them. However, at this point, the lender has not analyzed the home buyer’s credit reports or financial ability to buy a home. The pre-qualification process is based solely on the information the home buyer has provided to the lender. So you can see why it is so important for you to be as upfront, accurate, and honest about your financial ability at this point. If you’re not, you will just be wasting your time, as well as the lenders.
So what exactly does the pre-qualification process really do if nothing is verified?
Well, honestly, not much. However, what it does do is open up the line of communication between you and the lender about your home buying goals and for the lender to make suggestions and recommendations about what you might still need to do before buying a home. Additionally, it helps with ultimately getting your loan application approved once it has officially been submitted. It also allows the lender to go over the mortgage loan application process with you so you know exactly what to expect.
Now…on to the next step, which is getting the pre-approval letter. The pre-approval letter holds much more weight than a pre-qualification letter; therefore, you might consider going ahead with the pre-approval letter process rather than stopping after receiving a pre-qualification letter.
➣ Pre-Approval Letter
Getting a pre-approval letter, as you could imagine, is much more involved than getting a pre-qualification letter.
Here is what you will need and what you will have to do to obtain a pre-approval letter.
- Fill out a mortgage application
- Proof of identification including your social security number so the lender can pull your credit. A minimum credit score of 620 is usually required to qualify for a mortgage loan.
- Income verification using W2s and tax returns.
- A list of your assets.
- Proof of funds for your down payment via a bank statement.
- Your debt-to-income ratio will be calculated. Your total monthly debt is divided by your gross monthly income.
Here is the documentation required for a mortgage pre-approval letter.
- Most recent W2s (this will show proof of your employment).
- Last two years of tax returns.
- Pay stubs covering a 30-day period (this will show a year-to-date income amount). You will also be asked to provide pay stubs for any part-time income you receive.
- Proof of investment income.
- Two to three months of bank statements (the account where your down payment is coming from).
Please Note: If you are self-employed, there are other requirements you will need to fulfill. So ask your lender what they require in this instance.
At this point, the lender will have enough information about your financial situation to provide you with a pre-approval letter that states how much you are approved for.
What Should a Mortgage Pre-Approval Letter Contain?
What is contained in a mortgage pre-approval letter could vary from lender to lender. However, most commonly, a mortgage pre-approval letter will contain the following.
- The borrower’s name.
- The lender’s name.
- The loan amount.
- The purchase price.
- The interest rate.
- The terms of the proposed loan (number of months in the loan, etc.).
- The type of property it is (single-family home, condo, etc.).
- The down payment amount.
- The LTV.
- The type of loan program (FHA, VA, conventional, etc.)
The Benefits of Having a Mortgage Pre-Approval Letter
Numerous benefits come from taking the time to get a pre-approval letter before you begin shopping for a new home.
Here are the benefits of having a mortgage pre-approval letter.
- It increases your buying power because, in almost all cases, a seller will choose an offer that is accompanied by a pre-approval letter over one that is pre-qualified or doesn’t have either letter, even if that offer is slightly lower.
- It will speed up the closing process so you can close on your house sooner rather than later.
- Some sellers will only allow buyers with a pre-approval letter to tour their home.
- It will tell you ahead of time exactly how much home you can afford so you don’t waste your time looking at higher-priced homes you won’t qualify for.
- A pre-approval will give you an idea about any areas of financial improvement that if corrected or improved upon could ultimately award you with a lower interest rate, such as paying down your debt, etc.
Mortgage Pre-Approval Letter FAQs
1. How long will it take for me to get a pre-approval letter?
Well, it depends on how organized you are. If you provide the lender with organized copies of all the information and documentation they need, then it is possible to receive an approval letter as soon as the first 24 hours. But generally, the pre-approval process usually takes somewhere between one and three days.
However, with that being said, there’s always the possibility that the lender will ask you for additional documentation or that the lender suddenly received an onslaught of applications, which could cause a delay.
2. How long will my pre-approval letter remain valid?
In most cases, a mortgage pre-approval letter will remain valid for anywhere between 60-90 days. However, it can easily be updated by reverifying the information contained therein.
3. Can I be denied for a mortgage after I have been pre-approved?
Yes, you absolutely can! So you have to be careful with what you do in your life and finances, including curbing your spending, until after you have closed on your house.
And whatever you do…
DON’T CHANGE JOBS, APPLY FOR ANY NEW CREDIT, OR MAKE ANY MAJOR PURCHASES DURING THAT TIME.
These are some of the most common home buying mistakes that cost many a home buyer their final mortgage approval. And nothing is more devastating than losing the house of your dreams you worked so hard to get approved for, only to lose it at the last minute over something that could have been easily prevented.
4. Does getting a pre-approval cost money?
Typically, yes. When you submit a mortgage application, you will be charged a non-refundable fee for the lenders pre-approval services, which is usually somewhere between $300-$400. One thing to keep in mind, though, is that this is a non-refundable fee, so if you walk away from that lender, you will not get your money back.
5. Am I committed to the lender who provides my pre-approval letter?
No, you are not committed to any lender should you decide not to use their services. However, as we mentioned above, if you walk away after the lender’s services have been rendered, you will lose your application fee and any other non-refundable fees that lender has charged you. Not to mention, you will have to start the entire process over again if you change lenders. Therefore, you should research any given lender thoroughly before you begin the pre-approval process.
Helpful Tips for Getting You from the Pre-Approval to the Closing
DOs:
- Inform your lender of any down payment gifts you receive.
- Pay ALL your bills on time.
- Be consistent with your bill-paying habits. For example, if you always make minimum monthly payments keep paying that way. If you always pay your credit cards in full each month, keep doing it that way, etc.
- Make a list and have proof of all your bank deposits in the event the lender requests to see the source of any funds you’ve deposited.
DONT’s:
- Don’t make any major lifestyle changes such as changing jobs.
- Don’t apply for any new credit or co-sign for anyone during this time.
- Don’t make any large purchases at this time, even if it is a cash purchase.
- Don’t close any of your existing credit cards or open any new ones.
- Don’t make any large deposits or withdrawals; otherwise, it will grab the attention of the lender and could cause him/her to examine your loan file more closely.
- Don’t change banks or open any new bank accounts.
- Don’t do anything that would create a third-party credit inquiry on your credit reports at this time.
What’s Next?
Are you ready to get started? Contact Us today!
Lakeland Real Estate Group has been helping home buyers and sellers in the Lakeland, FL and surrounding areas for more than a decade, and we look forward to helping you too.
Don’t forget to grab your copy of our free Buyer’s Guide here.
Additional Mortgage Resources
Choosing an exceptional mortgage lender is crucial to making the home-buying process go smoothly writes Bill Gasset in his article on Tips for Choosing a Lender When Buying a House
Don’t make these mortgage mistakes! Xavier De Buck goes over the 10 Biggest Mortgage Mistakes First-Time Home Buyers make.
The sooner one begins working on their credit score prior to actually getting a mortgage the better off they will be with lower interest rates for the life of that loan as Michelle Gibson explains on How to Increase Your Credit Score to Buy a Home
About the author: The above real estate article “What Should a Mortgage Pre Approval Letter Contain and More” was written by Petra Norris of Lakeland Real Estate Group, Inc. With over 20 years of combined experience of selling or buying, we would love to share our knowledge and expertise. Petra can be reached via email at petra@petranorris.com or by phone at 863-712-4207