As you start your journey into homeownership, we know that you are going to have a lot of questions. We are here to help take some of the mystery out of home buying by sharing with you the knowledge we have gained through years of experience. It is our goal to help you feel confident and informed. 

1.What is Pre-Approval and Why Does it Matter? 

Pre-approval is a process where you meet with a lender to determine the maximum amount you can borrow based on the loan program you apply for. This decision is based on a review of your income, credit, debt, and down payment funds. This is the first step toward buying a home. It is important that you do this so that you know what you can afford and are able to look at homes within your price range. This allows you to begin the process with confidence.

Another reason this step is important is that not all buyers are approved right away and may want to do some credit repair before moving forward. Walking through the pre-approval process gives you a clear view of your financial status and allows you to plan for the future with confidence.

• Understand what you can afford
• Determine your monthly mortgage payment
• Understand your debt ratio
• Prepare for escrow
• Obtain a pre-approval letter
      *Your preapproval letter will state that the preapproval is valid for a limited period of  time, such as 60 or 90 days from the date it was written.
   

2. What is the difference between Mortgage Preapproval vs. Prequalification? 

 – A Mortgage prequalification generates an estimate of how much money you may be eligible to borrow. This may not include: Interest rates, credit history, proof of finances or any other fees. 

– A Mortgage preapproval is a much more formal and detailed process that requires you to complete a mortgage application form (either hard copy or digital). This includes submitting a full documentation to support your financial claims as well as undergoing a thorough examination of your credit reports and scores. Because applying for mortgage preapproval is essentially the same as applying for a mortgage loan, you may also have to pay an application fee.

In short, given that a prequalification may not include your credit history or other documentation proving your finances, it simply does not carry as much weight with sellers as a mortgage preapproval.

3. What Do I Need for a Mortgage Preapproval?

Be prepared to submit the following with your application:

• Personal Information: The lender will require proof of identity, such as a copy of your driver’s license or a passport, and your Social Security number.
• Request for a credit check: You’ll also be asked to authorize access to your      credit reports and your credit score. It’s wise to check your credit report yourself at least six months before starting the preapproval process to avoid surprises and to give you time to clear up any credit report inaccuracies that might be lowering your credit score.
• Income information: This includes pay stubs, bank statements and tax returns for the past two years. If you are self-employed, the lender will average the annual incomes you reported on your tax returns for the previous two years.
• Assets and debts: In the case your employment status or income changes, mortgage lenders typically like to see indications that you have resources available to cover your loan down payment and to help make your loan payments. Assets can include savings, investments and property you own. Outstanding loans and credit card balances will appear on your credit reports, but you will also be asked if you have any other debts as well.

*Note that requirements for down payments and other assets may vary by loan type. 

Be on the lookout for our next informative blog: What should my budget look like when purchasing a home?