Step 6: Getting Pre-approved by a Lender
What does a pre-approval mean?
Getting pre-approved allows you to confidently understand what you can actually afford. It does not lock you into a specific lender and you should review offers from both your pre-approval lender and competing lenders before you officially lock in your loan.
Pre-approval provides the buyer (you) with a guaranteed (assuming situations and circumstances do not change) loan amount, a monetary figure of how much home you can realistically afford to purchase. This will save you time by letting you know what homes are beyond your financial reach, and give you a better idea of your buying budget and associated mortgage costs.
Being pre-approved for a mortgage by a lender is an important part of any home-buying journey because it provides you with a strong negotiating tool. A pre-approval letter shows the seller that you are serious about buying a home. Often, simply having this letter can help propel you to the head of the negotiating line.
Does Being Pre-Approved for a Loan Commit You to Using That Lender?
Though you might be pre-approved for a loan through a lender, it does not mean that you are locked into using that lender. In fact, you should seek at least three different offers from three different lenders using the pre-approval letter from one to see if the others can provide a better loan offer.
Getting Pre-approved by a Lender
If you are thinking about buying a home, you should prepare for the pre-approval process as early as you can – at least six months before you apply. The earlier you start, the more time you will have to improve your credit if need be, and to collect all of your financial documents and any other information you may need.
If you don’t already have one, create a budget so you can get familiar with managing your money as efficiently as possible.
Only apply for a pre-approval with a lender that requires full documentation. This will permit the lender to accurately review your application. The documentation will be needed for the actual loan application anyway, so by providing it to the lender with the pre-approval, you’ll be that much further ahead. Plus, you don’t want to get pre-approved by a lender who doesn’t require documentation because it could very well be a false approval. When applying for a pre-approval, always be sure to disclose everything.
The lender will review your credit reports, income, and employment history and verify all of the documentation you provide. Once approved, your lender will provide you with a list of the loan programs you qualify for, as well as the maximum loan amount you’re qualified to borrow and the loan’s interest rate.
Applying for a pre-approval is essentially a scaled-down version of what you can expect when you apply for the actual mortgage loan. Therefore, it pays to prepare for the process and to manage it the same way.
Reminder – If you get pre-approved for a loan, it is critical that nothing changes with your credit, income, and employment status between the time of the pre-approval and the closing. The lender is pre-approving you based on your existing circumstances and information. Should something change, you may not get the final loan approval you’re looking for.
Read: Mortgage Pre-Approval