The first thing that we want to clarify before moving forward is there are 2 types of approvals. One is an actual pre-approval and the other, more common one, is a pre-qualification.
Pre-Qualification – A pre-qualification is not actually an approval but is typically based on a superficial, sometimes verbal, evaluation of your financial situation and history. In a pre-qualification, nothing is certain or guaranteed, like the loan amount, rates or even the possibility of obtaining a mortgage. Many sellers will sometimes overlook an offer with just a pre-qualification and may even accept a lower offer from someone with a verified pre-approval.
Pre-approval – A pre-approval, on the other hand, requires your lender to take a deeper look at your financial situation; income, credit score, job history, etc. This shows sellers that you have a higher chance to qualify for a mortgage that covers the value of their home. It also provides you with import information, such as the approximate rate and monthly payment, so that you and your agent can make the best decisions for you.
What Loan Offices will look at:
- Debt to Income Ratio – how much you owe every month versus how much you make
- Saving Patterns – Lenders want to make sure you have a down payment saved
- Credit – Past and current debts, repayment patterns and delinquencies, if any.
Some Lenders Require Additional Documents:
- W-2s for the previous 2 years
- Current Pay Stubs
- Federal income tax returns for the previous 2 year
- Bank statements for previous 2 months
- ID’s like a passport or driver’s license
So Why Get Preapproved
Getting approved for a mortgage is a major step in home buying. Getting pre-approved shows a seller that you are serious, saves time in the process and can potentially put you ahead of other buyers. Let me give you a few examples to illustrate.
You begin looking around online for homes you feel are in your budget that offer all the amenities you want and that are within your preferred location. After a few days or few weeks of searching you find the perfect home and you even start imagining your live in your future home. You have decided this is the one, no other home will ever compare, and you are ready to make an offer. This is where things can go awry.
In one scenario, you reach out to a loan officer and begin working on your application. After a few days all your documents are turned in and the loan officer is ready to provide you with that approval letter. You pass it along to your agent who is working up the offer on this amazing dream home. A few minutes later your agent calls and give you the crushing news that the sellers just accepted an offer and unfortunately, we must start the search again. In this scenario, had you gotten a pre-approval in the beginning you could have offered on the home as soon as you decided this was your home.
Another possible outcome could be, you reach out to your loan office and upon review of your documents you find that you do not qualify for this home at this time. This leads to another benefit of starting this process early on. By doing so you can increase your chances of being approved for the home of your dreams.
Disclaimer: We here at Absolute Realty Solutions are not mortgage lenders. This is simply for informational purposes only and is solely based on the experience over the years. We always recommend speaking to a licensed loan officer.