And while there’s little you can do about some things in the process, there is a way you can improve your chances of getting a mortgage, and that is by getting a pre-approval before you start shopping for a home. This will ensure you are getting the home you want.
Pre-qualification vs preapproval
While the two terms are similar in that they determine whether or not you can afford the home you want to buy, in reality they are polar opposites when it comes to being able to obtain a mortgage.
Here’s why.
Pre-qualification
When you obtain a mortgage pre-qualification, it simply determines what price range of homes you should be looking at.
Nothing more, nothing less.
A lender will take a look at your stated income and debts and tell you how much money you can afford to borrow. They don’t run your credit or verify anything…they simply use what you tell them to come up with a number.
While this can be helpful when shopping for a home loan in reality it’s unlikely to help you get the home you want because it doesn’t prove to the seller or his realtor that you’re financially able to buy the home.
Which means, of course, that any offer you put in will likely be rejected because the seller doesn’t want to miss out on a buyer with the financing in place.
This is one of the reasons why real estate agents typically require that you have a mortgage pre-approval before they will even show you a home that they’re listing…they want to be sure that you’re a serious buyer.
However, while a pre-qualification is not as useful as a pre-approval, it can bring some issues to light that would have prevented your ability to secure a mortgage.
You can then use the knowledge you gain to improve your chances of getting a loan.
Note: It is important to know that you are not obligated to use the same lender for your mortgage that gave you a pre-qualification or pre-approval – you can still shop around for the best mortgage.
Pre-approval
A mortgage pre-approval is a more comprehensive review of your financial status that will advise a lender whether or not to finance your home purchase.
To obtain a mortgage pre-approval you’ll fill out a loan application and to verify your current financial status your lender will do the following:
- ⬥ Run a credit check
- ⬥ Verify your income, work history and assets (if applicable)
- ⬥ And in some cases they’ll do an automated underwrite of your application (as opposed to one done by an individual)
The lender will use this information to determine your DTI (debt to income) ratio to determine what you can afford and whether or not they would be willing to lend.
Not only will a mortgage pre-approval show the sellers that you’re a serious home buyer, it’s a much more accurate gauge of affordability than a pre-qualification.
Documentation
Lenders will ask you for the following documents to complete the pre-approval process.:
- ⬥ Credit report
- ⬥ Bank statements
- ⬥ Pay stubs (if not self-employed)
- ⬥ Tax returns
Important facts about mortgage pre-approvals
- ⬥ They’re good for 60 to 90 days, on average
- ⬥ It’s conditional, based on information obtained at a point in time…if material changes happen (e.g. your credit score drops significantly or you obtain debt that throws off your DTI) the approval may change
Why you need a pre-approval letter
As the saying goes, “nothing is sure in life except death and taxes”, and as you can see the same holds true for pre-approval letters.
Regardless, in a hot real estate market a pre-approval letter combined with a great offer could be just the thing to get the seller to say yes.
And while it’s not mandatory that you obtain a pre-approval letter, if you’re really serious about buying a home when a seller sees that you’ve made the effort to get pre-approved they’ll be more open to your offer.
This is especially true if the seller has been burned by other prospective buyers.
