When you’re beginning the home-buying process, figuring out what you need to get your mortgage loan can seem complicated. You may even be tempted to find your dream home first before you apply for a mortgage. However, going through the pre-qualification and pre-approval processes at the start of your search can make the entire experience go more smoothly.
Before you meet with a lender or mortgage broker, you should have a good understanding of how the loan process works and what you’ll need to provide in your application. This guide covers the basics of loan application, qualification, and approval. You can learn what sort of information you have to provide at each step and what you can expect during the process.
When you start looking into mortgage information, you’ll probably notice references to two specific types of letters: pre-qualification and pre-approval. While these terms sound similar, they mean different things.
Some lenders use these terms interchangeably to refer to the process of a borrower providing financial information for the lenders to figure out approximately how much they are willing to finance. However, most lending institutions treat the pre-qualification and pre-approval stages differently.
In general, pre-qualifying for a certain loan amount doesn’t necessarily guarantee you will be approved for a mortgage of that amount. Before you get your heart set on purchasing a home in a certain price range, you may want to go through both pre-loan (qualification and approval) to ensure you can actually secure a mortgage for the amount you want. Making an offer on a property with a pre-approval letter in hand can also give the seller a favorable impression of your seriousness and financial situation.
What a Pre-Qualification Letter Means
Before you start attending open houses and browsing through online MLS listings, it’s a good idea to get your finances together. The best place to start is by securing a pre-qualification letter. This is essentially a document from a lender stating that you likely meet the requirements to secure a loan of a certain size, based on your stated finances but not based on any documentation. Perhaps the most important thing to understand about pre-qualifying is this: A pre-qualification letter from a lender is not a loan approval or a guarantee that the lender will provide you with a mortgage of the stated amount.
When you pre-qualify for a loan, you usually provide a lender with a top-level overview of your financial status. While some lenders pull your credit report as part of this process, others wait until the pre-approval stage to complete a credit check. In most cases, pre-qualifying is free and can be completed over the phone or online. Many lenders require specific information during this phase:
- Contact information
- Income data
- Summary of monthly payments toward debts, especially those a credit check may not indicate
- Financial assets (most lenders only require approximations at this point)
- Information on the home you’re looking for
If you are applying for a loan with a co-applicant, you’ll have to provide this information for both parties. Some lenders may request additional documentation, such as tax returns or bank statements, especially if one or both of the applicants is self-employed.
If you are looking for a mortgage within a reasonable price range and have a fairly good credit history, getting a pre-qualification letter should be reasonably simple and quick. Once you have your letter, you can start looking at the different available mortgage options and talking with a lender about which one is best for your situation. Additionally, pre-qualifying means you’re on your way to securing a loan approval.
What a Pre-Approval Letter Means
If you want to make sure you have your financial ducks in a row before you make an offer on a home, you can continue working with a lender to get pre-approved for your mortgage. Unlike pre-qualification, pre-approval generally involves a much more in-depth look at your financial circumstances. In most cases, you follow several steps to secure approval:
- Completing an official loan application
- Submitting financial documentation
- Agreeing to a credit check
If you meet all the lender’s requirements, you will receive a pre-approval letter. This document provides more of a commitment than a pre-qualification letter, though nothing is official and guaranteed until you sign the papers to close on the loan.
There are two significant advantages to going beyond mortgage pre-qualification and securing a pre-approval letter. First, you will know exactly how much you can afford to spend on a house and what your monthly payments will look like for a loan of that size. Additionally, you can let a seller know that your offer is serious and legitimate; he or she won’t have to worry that the deal will fall through because you can’t secure a mortgage for the right amount. Having your financing arranged before you make an offer can give you a significant time advantage over other buyers, especially in a competitive market.
What Happens Next
Is the pre-approval letter the final step in the process of getting a mortgage and purchasing your new home? No, there are more steps after pre-approval. Most lenders want to approve the property you are purchasing so you will need to get the house appraised. Lenders also check your income, assets and credit again to ensure everything is the same as it was when you got your pre-approval. Once you have been approved for the amount of the loan and the lender has signed off on the house you want to purchase, you should receive a loan commitment letter.
Before you can close on your home and move in, you have to secure homeowner’s insurance. Finally, your title work is drawn up, and then you meet with all the interested parties to sign everything on closing day.
How To Simplify Your Home-Buying Process
While buying a new home can be an exciting time, it can also require complex paperwork, especially when it comes to securing a mortgage loan. In most cases, there is no requirement to have your mortgage approval before you make an offer; however, having your financing approved can increase your chances of having your offer accepted. If you’ve completed the pre-qualification and pre-approval steps, it can also shorten the amount of time it takes to finish all the official paperwork and close on your loan.
One of the best things you can do when you’re looking for a home is work with an experienced and reliable mortgage lender. Brian Martucci has a clear process in place to guide you through the process and help you understand each step. To learn more or get started on the application process, use this contact form or start the pre-qualification process here.