It is always tempting when wanting to buy a home to go hit the streets and find your dream home. Then you make an offer. But if you have not even started the mortgage process before you make your offer, you will likely discover that the seller and the real estate agent will not take your offer seriously. Why? Because you have not taken the time to get pre-qualified and eventually pre-approved on your mortgage.
The pre-qualification and pre-approval process show the seller and real estate agent that you have the ability to actually close the deal and buy the home. That is why it is important to take care of essential mortgage loan details before you start looking at homes.
Below is information about getting pre-qualified and pre-approved for a home loan.
Getting pre-qualified for your home loan is the first step to eventually getting a loan. This is where you talk to a mortgage lender and tell him about what your income, assets and liabilities are. He then can give you a rough idea of the price of the home you can afford.
But note that being pre-qualified for a home loan is just by word of mouth. The lender is only able to provide a rough estimate of the home you may afford and what the maximum monthly payment will be. Pre-qualification is not a binding agreement. It is just an early informational process that will help you to understand what you might eventually be approved for.
Having the ability to provide a pre-qual letter is very important for 1st-time home loan situations.
Reasons to get pre-qualified for a mortgage are:
- You understand what your rough price range is.
- You get to know one or more mortgage lenders who may eventually get you a home loan.
- You can at least look at a few homes in your rough price range to understand the type of home you can buy and the general neighborhood. This is helpful for helping you to make early plans about moving.
- Getting a pre-qualification will eventually get you to the next step of the approval process – pre-approval.
Now that you have been pre-qualified for a home loan, you can get pre-approved. This is the step where you back up your claims about income, assets and liabilities, and actually provide the lender with your financial documents. These include W-2s, pay stubs, tax returns and bank statements. With these financial documents, the lender can actually verify all of your critical financial information. They also will get your SS# so they can check your credit score and what your current debts are. Lenders also will usually verify that you work for the employer or employers you claim. They want to see ideally that you have been working for the same employer or in the same industry for the last two years.
If you are self-employed, you will also need to provide a profit and loss statement for the current year. The lender may also want to see more tax returns to show that you have steady income for the past few years. Some lenders may even want to talk to current clients or customers to ensure that you have reliable income. Whether you are considering Fannie Mae, FHA, USDA or another loan program, there are obtainable options with competitive pricing.
Reasons to get pre-approved for a mortgage are:
- A mortgage pre-approval letter is usually required to make an offer on a home that is taken seriously by the seller and his real estate agent. A person without proof of funds to buy a home will usually be dismissed as a non-buyer.
- Pre-approval means that your financial qualifications have been verified by the lender, and you should be able to eventually close on the loan if you choose to do so. Pre-approval does not guarantee final approval; there are issues that can crop up during underwriting that could result in the loan being declined. But for the most part, pre-approval is a strong sign that you can eventually get a mortgage approval and buy a home.
- It shows you the exact type of loan you can get, approximate interest rate and down payment. When you are pre-approved, you will know most of the particulars about your home loan, including maximum price, monthly payment and the rough interest rate. Until you lock the rate before you close, the rate can fluctuate, but you will have a good idea what it will be.
- It also means that you can make an offer on your home and get ready to close, if it is accepted.
The bottom line is that mortgage pre-qualification and pre-approval are essential parts of the home buying process. Have both of these important matters taken care of before you start to seriously look at homes and make any offers. Doing so will ensure that you will actually be able to buy your dream home.
Due to the roaring economy and low unemployment rates, the Federal Reserve has indicated that there may be one more interest rate hike this year. It remains unclear as to if the trend up higher mortgage rates will continue in 2019, but that is why so many loan officers are suggesting now is best time to lock a mortgage rate while they are still below 5%.