When shopping for a mortgage, you need to have any and all information that will expedite the process. Knowing what limits you are working with can also help you during the negotiation process; this is where mortgage pre-approval comes in, along with a strong credit score.
Mortgage pre-approval is a certified letter from a lender indicating how much you can borrow. It also states the different kinds of loans that you may be eligible for and the interest rates that you should expect. The letter is valid for around 60-90 days, after which you need another pre-approval assessment for your mortgage shopping.
Requirements for a Mortgage Pre-approval
Being a financial assessment of your mortgage eligibility, the pre-approval process involves looking at the health of your credit. Among the requirements that lenders will ask for include;
- Social Security Number
- Permission to access your credit report
- Recent pay stubs
- Federal Tax Returns
- 2 months bank statements (all accounts types)
It’s important to note that a pre-approval letter is not a contractual agreement between you and the lender. It’s just an assessment and not a commitment to give you the loan.
Benefits of Mortgage Pre-approval
- Saves on time
Pre-approval provides you with an overview of the amount of loan that you qualify for. It also helps you to narrow down the types of mortgage programs that are available to you. This comes in handy in shortening the time that you may have spent on mortgage shopping.
Think of it this way; without a shopping list, you waste time by going up and down the aisles in a supermarket trying to locate what you might need. With a list at hand, you pick specific things, and in a short while, you are done. Pre-approval works in basically the same way; you spend time rate-shopping only on the specific loan(s) that you qualify for.
- Lenders take you seriously
Real estate is a very competitive industry. Lenders don’t want to waste time on people who are not serious about homeownership. It’s easy for them to dismiss your application if they are not confident in your commitment.
A pre-approval letter goes a long way in adding weight to your loan application. It shows that you a prospective client and that your offer demands serious consideration.
When a lender takes you seriously, your approval gets a boost. They will speed up the process since you have already demonstrated the ability and serious intent of purchase. Yours becomes a done deal and your application gets a head-start in closing. The appraisal can begin immediately which can lead to a shortened closing period; by a week or two.
- Gives you negotiation power
When a lender is negotiating with you, he will offer rates depending on the seriousness of your application. This means that he may offer somewhat prohibitive rates because he is banking on someone else who might also be lined up for the home. This is a genius business move on his side since it’s all about making the sale.
Pre-approval is a sure way to avoid this kind of frustration. The letter gives you an edge on the negotiating table. Your application will be carrying more merit and the lender will be more inclined to offer you cheaper rates. Pre-approval may also allow you to negotiate the rates to the lowest allowable for your loan amount and credit score.
- Knowledge of other costs
Apart from the principal amount and the interest that a mortgage will attract, there are other additional costs to contend with. Knowledge of these costs allows you to plan better and shop for a loan that you are able to sustain. Pre-approval allows you to have an idea of what these costs entail.
You will be provided with a list of additional costs that are to be expected. These include closing costs, homeowner’s association fees, taxes, and other government fees. This is important especially to those in the market for the first time. It will come in handy when you have to make a decision on a home that might require restorations or upgrades once bought.
Getting pre-approved for a loan is an important step when shopping for a mortgage. It allows you to only concentrate on the property that you can afford. Lenders also get to take you seriously when you are bargaining on the rates. Your mortgage application also gets to be hastened since the pre-approval letter shows your income’s ability to pay off the loan.