An important and necessary step to buying a home is getting a mortgage, unless it is 100% cash down payment. The process can be intimidating for first-time buyers. The best place to start is to get preapproved by a lender.
“If you are thinking of buying a home, it’s best to start the qualification process as early as possible,” says Tim Williams, vice president of mortgage services @ Heritage Bank.
A pre approval ( or pre-qualification) letter is a document from a lender stating that they are tentatively willing to lend you money up to a certain amount. Different lenders use the terms prequalification and preapproval differently. Some lenders may only offer a prequalification, while other lenders may only offer a preapproval. for simplicity, we use the word preapproval in this article.
Preapproval is based on certain assumptions, and while it’s not a guaranteed loan offer, it does let a seller know that you’re likely to get financing. Sellers frequently require a preapproval letter before accepting your offer on a house. Without it, you could lose out on a house you really like to another buyer who is preapproved.
A preapproval letter may have an expiration date ( typically 30 to 60 days). Because of this, some home shoppers wait until they’re ready to start shopping before getting preapproved. But getting preapproved early in the process is a good way to spot potential issues ( such as errors on your credit report) in time to correct them.
“You can gain valuable feedback, not only on where you stand currently, but also regarding advice on the actions you could take to help improve your credentials,” says Williams. “It’s always better to start sooner rather than later.”
Every lender is different, so find out what documentation is required in order to get preapproved. Some lenders base preapproval letters solely on the information you provide. Other lenders dig into the details with you now to make certain you have all the documentation you need. This can prevent delays and surprises later.
All lenders will require documentation at some point if you decide to apply for a loan. It’s better to know now that you need an additional document ( which could take some time to get) than when you’re about to close on your dream home.
Ask your prospective lender what assumptions they made to issue your preapproval. Is there anything about your situation that could lead to your loan being denied later on? Are there factors that could increase your interest rate or loan costs?
Lenders preapprove you by looking at income, assets, debts and credit history, but your financial life is much more complicated than that. Only you can decide how much to spend on a home. If a lender preapproves you for more than you want to spend, you can still use the preapproval to shop for homes without changing your target price.
Be up front with your real estate agent. If you don’t want to see homes above a certain price, say so. Limiting your search is a good way to avoid falling in love with a house that costs more than you want to spend.
If you’r preapproved for less than you were planning to spend, ask the lender if there was a particular factor (your income, for example) that limited the preapproval amount. You may need to adjust your home price expectations.
Getting preapproved is important because it helps you shop for a home, but at this stage lenders aren’t in a position to give you enough information for you to decide which lender offers the best deal. Getting a preapproval doesn’t commit you to using that lender for your loan. Choose a lender after you’ve made an offer on a house and received official loan estimates from each of your potential lenders.
- Portions courtesy of the Consumer Financial Protection Bureau