Buying your dream house is not easy! It involves a lot of things, some of which you have to tackle on your own, and the rest is taken care of by your real estate agent. The home-buying process is quite long.
Most people start looking at houses even before they control their finances. As a result, they set their sights and heart on a house that is way out of their budget. So, they need to figure out how much house they can afford.
So, how to go about this? By getting pre-approved for a mortgage!
Though a pre-approval letter is nonbinding, it eases your way into the seller’s mind. It makes them believe that you are a serious buyer.
Pre-Approval vs. Pre-Qualification
Most people use the terms pre-qualification and pre-approval interchangeably. However, they both have different meanings.
A pre-qualification letter provides an estimate of how much house you can afford. On the other hand, a pre-approval letter approves you for a specific loan amount. It is valid for 90 days and allows you to get your affairs to buy the house.
Remember that the pre-approval letter is based on your credit, employment status, and verified status. If the house valuation reveals that the property costs much more than what you are approved for, you will have to pay the rest of the amount out of your pocket. A pre-approval letter allows the buyer to discuss loan options with the lender.
Requirements for Pre-Approval
- Proof of Income: Tax returns and W-2 wage statements from the last two years and pay stubs.
- Proof of Assets: Account statements to prove that the buyer can make the down payment and pay for the closing costs.
- Good Credit: A FICO score between 620 and 680 for low-interest rates.
- Employment Verification: Salary slips.
- Other Documentation: Personal identification, Social Security number, driver’s license, and allowing the lender to check your credit report.
Why It’s Important To Get Pre-Approved
A pre-approval letter is proof of affordable financing. For example, you look at a house and find the one you and your partner love. It has the exact same architectural features you had in mind, and the house is in a great neighborhood.
You approach the seller and make an offer. The seller asked if you could show the pre-approval letter to lock the deal. However, you don’t have one. You tell the seller you are good on the money and will be approved for a loan.
You approached a lender for the mortgage, but your application was rejected. Your credit history does not look good, and the lender is wary of lending your money.
You approach another lender who agrees to approve your application but at a high-interest rate. The seller can no longer hold the house for you and considers other offers coming in.
None of this would have happened if you had gotten a pre-approval letter!
In conclusion, a pre-approval letter allows you to plan your budget after making such a huge investment. It tells you your monthly payments and how long it will take to pay back the mortgage to build equity.