Wondering how much house you can afford?
As a first-time homebuyer, you may be wondering how to save money on your mortgage. The best and smartest way to go is by getting pre-approved for a mortgage before you start looking at homes. If you get approved beforehand, it can save time because when selecting homes for purchase, the potential buyer will only need to see houses within their price range or loan limit. Below is more information about pre-approval and its advantages.
What is the difference between Pre-approval and Pre-qualification?
When you are first getting started with the loan application process, two steps need to be completed. The first step is pre-qualification. Pre-qualification is a rough estimation of how much money a lender is willing to give you based only on the data they have at hand. This includes your income, credit score, and debts or liabilities.
However, this information may not be complete or up to date. You can continue with the second step which is pre-approval. Pre-approval means that your lender has more access to your financial data and is willing to give you a final number on how much money they will lend you for the house purchase. This is based on the information you provide to the lender.
Advantages of Pre-approval
- Instant loan approval and disbursal – Being pre-approved will get you to the next step of your home buying process. You can get any money needed for the down payment, closing costs, and fees disbursed at once upon closing on your home.
- Flexible repayment loan period – Being pre-approved allows you to look at homes in the future and beyond your seller's closing date. You can apply for a loan with an adjustable-rate, but choose a repayment period of up to 30 years.
- Paperless – The pre-approval process is paperless for homeownership. You can do it all electronically instead of wasting time faxing in forms and running between your computer, printer, and mailbox. On average, you get an approval or denial within 48 hours of submitting the final form.
Disadvantages of Pre-approval
- Interest may increase – If you are looking to borrow a significant amount of money for real estate, the interest rate may increase after you are pre-approved for the loan. This is because your credit score does not stay the same over time, and it needs to update it every six months.
- No closing costs or fees saved – When applying with a lender who offers pre-approval, you are not given money for closing costs or expenses in advance. You will have to put this money down when the time comes to go to closing.
- Mismatch in your documents leads to declination – Another major disadvantage of pre-approval is that you may not receive final approval that matches the lender's needs.
- Pre-approval doesn't necessarily mean you are approved for the loan – A final point to make is that pre-approval does not necessarily mean you are approved for the loan. There will be a different amount of paperwork and documentation required to show the lender that you are qualified for a home loan.
Advantages of Pre-qualification
- Helps you negotiate better – When you are pre-approved for your loan, the lender gives you a final number to use when negotiating your price. This means that you can be more assertive with the Realtor and not go back and forth as much.
- Shows you are serious – Being pre-qualified makes you appear serious about purchasing a home. This can help in your negotiations because lenders will know you aren't just shopping around.
- Helps your case close faster – When your offer is submitted, the lender will make a quick decision on whether they will accept or deny it. This means you can get into a contract and close faster than if you had to wait for the pre-approval decision.
Disadvantages of Pre-qualification
- Affects your credit score – Since your credit score is pulled more than once during the pre-qualification process, it can affect this number. If you are not careful with which lenders pull your score, you may end up with more bad marks on your report.
- No loan is guaranteed – Unlike pre-approval, there is no guarantee that you will be approved for a loan. You are still responsible for all of the paperwork and signing.
When to Request for Pre-approval?
If you were already pre-qualified with a lender and had been looking at homes from a real estate agent, it is best to request a pre-approval. It can definitely help when you're purchasing a home.
Who Avails a Pre-approval?
Almost all lenders offer this service today, but it can vary depending on which company you choose. You also have the option of applying with a broker who may find a lender who offers pre-approval with lower interest rates and fees.
How to get Pre-approval or Pre-qualification?
The very first step you need to take is to check your credit score. This can be done on a free website. If your credit score falls below the minimum threshold set by the lender, you will have to improve it before applying for a pre-approval.
If you are already meeting the floor price set by the lender, you may proceed to apply. Fill out all required paperwork honestly and completely if you want to improve your chances of being approved.
Requirements for getting Pre-approval
If you want to get pre-approval for a loan, you need to have decent credit. Many lenders will require a FICO score of 640 or higher before they can approve your request.
Also, to be considered for pre-approval, you'll need to prove that you can repay the loan that you apply for. This can include having a steady income or access to funds through another source. The lender may also ask about what your total debt is compared to how much you make monthly.
Pre-approval for a home loan can help you get the best rates, but it also requires more effort than simply applying for prequalification. You will have to prove that you are serious about purchasing by showing steady income and access to funds. This can be difficult for some people to prove, but your chances of being pre-approved increase dramatically if you do it right.
If you are looking forward to getting a loan preapproval or prequalification so that you can buy a home, reach out to us. We are a team of experienced realtors and we will give you professional advice from preapproval to moving into your new home.