If you're ready to start shopping for a condo, you'll want to consider your financing options and what you can afford. A good place to start is deciding whether you want a mortgage pre-qualification or pre-approval.
You have two options — prequalifying for a loan first and then getting preapproved or skipping prequalification and seeking preapproval.
Here's how the process works.
Knowing the difference between pre-qualification and pre-approval
There are thousands of lenders, not just banks but financial institutions that do little but loan money for homes. Even if you have a trusted banker, it's a good idea to shop around and approach multiple lenders. They will provide you their offers on a variety of factors, including interest rates, points, fees and closing costs — and you can select the one that's best for you.
You have two options — prequalifying for a loan first and then getting preapproved or skipping prequalification and seeking preapproval.
Prequalifying is an informal, nonbinding review of your financial documents by a lender. It gives you a rough estimate of how much you can borrow for a home. It's a great step for someone who wants to explore getting a mortgage but isn't ready to sign a binding loan agreement. Lenders may ask for your income, debts and assets and do a soft credit check during this process.
There are several advantages over a pre-approval. A lender needs fewer documents. It can take a few minutes to complete, and an opinion on your "loan-ability" can be made quickly. It does not require the lender to pull your credit, so it doesn’t impact your credit score.
But a pre-qualification is not as useful as a pre-approval. There’s no formal verification of assets and liabilities and no commitment from a lender to stand by its evaluation of your finances. This keeps it from giving an offer more weight.
“If someone's just exploring, a prequalification is totally fine,” Rachel Lowell, a broker at Marketplace Homes in Plymouth, Michigan, told Homes.com. “But once you're ready to get serious about buying, a preapproval really starts to make sense. It can help you stand out and shows a seller that you're ready to go today.”
A pre-approval involves a more thorough review of your financials. The advantages are that it's more accurate than a pre-qualification and it shortens the underwriting process, if your offer is accepted, because you’ve already gotten a head start on verifying your assets.
A disadvantage, though, is that it takes longer than the process for the pre-qualification. Also, because the lender is pulling your credit it could lower your credit score.
Pre-approval offers “solid financial proof that you do qualify for a mortgage,” Jose Hernandez, a real estate broker at Coldwell Banker in Chicago, told Homes.com. “It will determine the outcome of your offer, because sellers prefer a pre-approval over a pre-qualified letter."
Lenders typically review income, assets and credit for a pre-approval. You'll need these documents:
- Photo ID
- Pay stubs, W-2s and tax returns (typically last two years)
- Recent bank and investment statements
- Credit report (A credit score of 620 is typically the minimum needed to qualify for a mortgage, but a higher score can help you secure better interest rates.)
- Additional documents as needed (letters indicating you received gift funds to help you make the purchase, rent payment receipts, divorce papers, proof of other income)
Lenders usually require at least two years of personal and business tax returns, recent bank statements and proof of consistent income. Self-employed workers have monthly incomes that vary because they are not on a salary. Obtaining pre-approval for self-employed workers typically requires more extensive documentation and a more thorough financial review than for traditional W-2 employees.
Homes.com can help you figure out the cost of homeownership. Attached to each listing on the site is an online calculator that shows you how much you'll pay every month, including home insurance and property taxes (you pay those when you own instead of rent). You can adjust for things like down payment and interest rates.
Pro tip: Don't let the size of the down payment scare you when you use the calculator. Its default setting is 20%, the amount a bank will want you to put down. You can put less down — often as little as 3.5% for certain special government programs such as the Federal Housing Administration home loan.
What's included in a mortgage pre-approval letter?
A pre-approval letter is pretty straightforward. It includes:
- Lender's name: The name of the financial institution issuing the pre-approval.
- Borrower's name: Your name as the prospective condo buyer.
- Address: The address of the condo you’re considering, or sometimes just the area where you plan to buy. This can be subject to change.
- Purchase price: The price of the condo you’re looking to buy.
- Maximum loan amount: The maximum amount you're pre-approved to borrow.
- Interest rate: The estimated interest rate for your loan.
- Loan term: The length of your loan (for example, 15 or 30 years).
- Loan type: The kind of loan you’re pre-approved for, such as conventional, a United States Department of Agriculture loan, Federal Housing Administration or FHA loan or a Veterans Affairs or VA loan.
- Conventional: Not backed by the government; typically requires higher credit and down payment.
- FHA: Backed by the Federal Housing Administration; designed for buyers with lower credit or smaller down payments.
- VA: Backed by the Department of Veterans Affairs; available to eligible veterans and service members, often with no down payment.
- Seller credits: Any credits from the seller that will be applied to your closing costs.
- Deposit: This is often called “earnest money” and is a sum of money you put down to show the seller you’re serious about buying the condo. It’s typically held in an escrow account and later applied to your down payment or closing costs.
When buyers make offers, the seller will want to know if they have a pre-approval letter to ensure they're financially qualified. Pre-approval letters usually expire between 60 and 90 days. You can get it renewed if you haven’t found a condo during that time. Mortgage pre-approval isn’t a binding commitment. A pre-qualification or pre-approval doesn't actually guarantee a mortgage offer.