A pre-approval letter is your golden ticket to homeownership and getting pre-approved is the first crucial step in the home purchasing process. So, if you are currently in the market for a home, it is time to get serious about getting pre-approved. To do this, you need to gather the following documentation:
income and employment details
employer contact information
bank account and retirement account statements
an account of any/all assets
a list of property in your name or that you have ownership in
and a detailed history of your debts and other liabilities
With this documentation, lenders can make a hard credit inquiry, which is vital in determining your pre-approval status.
Why It Matters
Once the home buying process is underway, you will quickly see why it is essential to have a pre-approval letter. A pre-approval letter gives you a better understanding of your immediate financial situation. This means you have a better idea of how much you should borrow, your possible down payment, and which loan programs you should consider. Equally important, a pre-approval helps narrow down your potential home prospects to affordable houses within your budget. And if any issues arise during the pre-approval process, you can address them before you start house hunting.
A bonus of getting pre-approved is that it demonstrates to sellers that you are serious about purchasing a home. Being pre-approved puts you ahead of the curve, making you appear more competitive to sellers, which can be extremely helpful if a bidding war breaks out with other potential buyers.
Pre-Qualified or Pre-Approved
You should know the difference between a pre-approval letter and a pre-qualification letter. To put it simply, the Federal Reserve defines a mortgage pre-approval as a lender’s written commitment that they have fully assessed a potential buyer’s overall creditworthiness. Pre-approval status is also conditional upon such things as finding a suitable property, continued creditworthiness, and additional terms required by the lender.
In contrast, a mortgage pre-qualification is less formal and states that you could qualify for a lender’s current loan program for a pre-determined amount. However, it is worth noting that a pre-qualification letter holds very little weight with sellers or real estate agents. So, it is in your best interest to secure a pre-approval letter. It is a more acceptable, comprehensive, and in-depth assessment that puts you in the best position to become a homeowner.
After being Pre-Approved
Once you receive your pre-approval letter, you must remember it's only valid for 30 to 90 days. As a result, you should wait to get pre-approved if you are not currently in the market for a home. In addition to being temporary, your pre-approval status is also conditional, as briefly mentioned above. Therefore, it is vital that you don’t do anything that would revoke your status. Remember, incurring new debt, losing or switching jobs, or any drastic changes to your income can cause you to lose your financing. A decrease in your credit score or a loss in assets can also affect your status.
That said, life happens, and you cannot control every aspect of it, so if something changes, speak with your lender to ensure that your dreams of homeownership aren’t dashed or unduly delayed.