In a nutshell, searching for a home is a pleasant thing, but searching a new home without pre-approval mortgage letter is not pleasant. A pre-approved letter gives you more advantages at the time of buying over those buyers who have not the pre-approved letter. It gives you a realistic idea of how much you can afford. It is the first every step of the home buying process. Many people confuse between pre-approved and pre-qualified. Below let’s understand the difference between them.
Pre-approved VS Pre-approval
Pre-approved: Pre-approved means a buyer credit history, income, and financial history are already reviewed by the lender. The lender has enough information about the buyer and for him, a buyer is an attractive customer. A lender offers pre-approval letter which shows that how much a buyer approved for.
Pre-Qualification: If buyer received a pre-qualification letter which means he/she is likely to meet the lender’s credit history criteria. Up to now, a lender has not got your credit score information, it’s just lender is thinking your credit history could match with their criteria. Hence, in real-estate investment, pre-qualification doesn’t play any major role.
What is Mortgage Pre Approval?
It is possible to get pre-qualify without doing anything. But, getting a pre-approved needs efforts and systematic process. That process includes your lender, seller, and seller agent.
The Mortgage Pre-Approval Process:
For getting a pre-approval process, begins with filling an online loan application form. Additionally, you have to submit some income and credit score documentation for a verification process.
- Bank statements.
- Credit score.
- Proof of income or self-employment.
- Past 3 years Tax returns.
- Past 2 years of W’2
And all these documents you will be asked to provide within 30 days of filling loan application. Having all these documents are enough to get a pre-approval letter, you need to meet with minimum credit requirements, and you cannot have any late payment and excessive debt.
Being Pre-approved for buying a home is necessary:
In the current real estate market, the seller needs a pre-approval letter. It gives confidence to the buyers and ensures the seller that he is an ideal customer for this property. Most of the lenders don’t take any charges for pre-approval letters. One of the major advantages of pre-approval letter is that you will get a better idea of how much you can afford. Hence it saves you from going outside of the budget. After receiving a pre-approval letter, it lets the seller know that the lender has reviewed financial profile like income, credit history and so on. This process gives confidence to the seller that you are almost eligible for buying a property and can pay effortlessly.
You will be altered to potential problems:
There are so many lenders out there market and their mortgage rate is different and process also. But, their major concern is the same that is read your credit score and check income. So, before buying a home, it is vital to share all the financial conditions with the lender. If your debt to income ratio is not good, he would suggest to improve it and then buy home. So, the obstacle you will be faced during loan sanction after making an agreement with the seller these can be resolved and altered at the time of pre-approval. Once you have made your credit score good, you can get pre-approval at the best mortgage rate from the lender.
Time frame to get Pre-approval letter:
The process of getting a pre-approval letter happens quickly, most probably the same day. If you submit all the financial documents to the lender and if credit score match with their expectation level, you will get a pre-approval letter in no less time. The time-frame of getting pre-approval letter depends on the complexity of the buyer’s finance.
If you are just thinking about to buying a home and have no exact idea how much you can afford, going through pre-approval process will evaluate your budget and give you clear insight how much you can afford.
How much good credit score are required for getting pre-approval letter?
For getting a pre-approval letter your credit score must be above 650. With a good credit score, you not only get the pre-approval letter easily, but a mortgage rate is also low. Your credit score solely refers to your borrowing ability. So, if you want to live in a villa or 3-bhk luxe apartment, your credit score must be higher than 650.
Credit Score Ranges 720+ = Excellent Credit 680-719 = Good Credit 620-679 = Fair Credit 580-619 = Poor Credit 579 or under = Bad Credit.
How does the pre-approval process work?
Applying for the mortgage is a hassle-free process. Most of the lenders can pre-approve instantly, after checking your credit history. First, you fill a loan application, you have to enter your social security number and identifying number to pull your credit. A mortgage credit check is also known as a hard credit check. Once the lender has done a hard credit check and he is satisfied by your credit score, you will get a pre-approval letter. This official document signifies that you are an attractive customer and financial profile is good.
Pre-approval letter typically includes, down payment amount, loan amount, purchase price, mortgage rate, loan program, expiration date, and the property address. Many sellers ask to submit bank statement and assets statements.
What factor impact pre-approval?
If you are unable to raise the request for the pre-approval letter due to poor credit history and want to maximize your chances for getting pre-approval. You have to work on the following factors.
- Debt-to-income ratio: Borrowers have to maintain this ration below 43% of their total monthly income.
- Loan-to-value ratio: It is a down payment, so the higher your down payment, the quicker you will get a pre-approval.
- Credit history and FICO score: Always pay the bills on time, clear your past debt and build your assets Column, if you want to increase your credit score. 90% of lenders reject the pre-approval letter because of poor credit score. So, you should maintain your credit score in the upward direction.
- Income and employment history: If you have a solid income and passed from the reckoned university, it ensures lenders that you can easily repay a loan and handle the burden of the new mortgage rate.
Pre-approval letter plays an important loan while getting a home. This letter shows that you are a good buyer and have a great ability to tackle new mortgage rate. Once you gathered all the documents, this is the perfect time to apply for loan application and get a pre-approval letter to ensure that you are the best customer of his property.
Lastly, be cautious while selecting a lender. There are so many lender in the market, which give pre-approved letter even at a poor credit score, but their mortgage rates are very high. Sometimes, it let borrower in a big debt hole. If your credit score is not good enough for availing a request of pre-approval letter, make it good first and then raise the request. Always keep in mind, a high mortgage rate is a sign of vulnerable debt.