Most of us have spent a great deal of time imagining our dream home; the granite countertops and stainless steel appliances…the awesome outdoor deck…the night all our friends come over to see our new, shiny home…
After a couple hundred hours searching far and wide for this perfect home, you find it! It’s everything you hoped and dreamed of for so long. After scrounging up the courage to make an offer you head to the bank to obtain your loan.
After the bank processes your application, they call. Your loan application has been denied.
Your dream just turned into a nightmare! How could this have happened? What could you have done to prevent this from wrecking havoc in your life? If ONLY you had recevied pre-approval from a mortgage professional before beginning the search for your dream home…
You might be thinking “That wouldn’t happen to me…I have great credit, low expenses, and strong income…” Unfortunately it happens everyday to people in your situation. In the past 20 years banks and lenders became very relaxed in their lending standards and made loans to people who never should have received them. Today, the tides have shifted completely and now banks are overly cautious and unrightfully stringent on borrowers. To make matters even more challenging, did you also know that not only do YOU have to qualify but the HOME also has to qualify?
Getting pre-approval from a mortgage professional is imperative before beginning the search for a home. It is important to understand the price range you’re able to afford and specific aspects of your financial situation that may determine your eligibility. When you make an offer on any property, a pre-approval letter from a mortgage professional also gives your Thrive Realtor more opportunity to negotiate the price with the seller.
Below are explanations of two different types of “pre” letters that can be obtained from a mortgage professional:
Pre-Qualification letters are given as informal and tentative approvals for buyers. The lender issuing the letter would have taken information regarding the buyers’ financial situation in order to determine eligibility; however, they would have NOT verified the accuracy of the information. Since the lender would not perform a credit check of the buyer at this point they are in a position to withdraw their approval if additional financial (or other significant) factors are later uncovered. There is no charge to obtain Pre-qual letters.
Pre-Approval letters are formal agreements and offer buyers’ a guarantee of loan approval for a specific amount. The lender issuing such a letter may or may not charge for this service – our recommended lenders do not. They will verify credit history, employment status, assets and liabilities to help determine the amount of credit they are able to offer. If you are a serious buyer, this is the suggested “pre” letter to obtain. Keep in mind that even with a pre-approval letter, your lender may deny the loan on the specific house you wish to purchase. As one example, banks will deny the loan for a specific property if the appraisal is significantly less than the sale price.
Get pre-qualified with a lender. Do this first before you begin looking at property. Your Thrive Realtor will need your mortgage qualification letter in order to know the price point you should be looking in for properties, and it will significantly strengthen your offer when you find a home. Your mortgage lender will prepare a good faith estimate, which will detail every fee you’ll likely pay for your closing costs.
Differences between mortgage prequalification, preapproval and final loan approval:
- Prequalification is the process where the lender will look at a basic copy of your credit report and use the information you supply to determine how much mortgage you can afford based on your income. No accounts or employment information is verified.
- Preapproval occurs when all credit and employment is verified and the mortgage is approved, subject to the appraisal of the property you have chosen to buy. Being preapproved for your loan can make your offer appear stronger to the seller.
- Final loan approval occurs when the property has been appraised, all documentation is in the hands of the lender and all contingencies have been met.
To prepare for loan preapproval, begin to gather the following items:
- Last 3 years Income Tax returns
- Copies of all bank statements for the last three months
- Copies of all account statements, including stock brokerage accounts
- Current copies of pay stubs
- Records of any supplemental income you may have
- If you are self employed, you will need all business records and tax returns for the last 3 years
- A gift letter (if part of the money you’re using is a gift from your parents, friends, or other relatives.).