Home Loan Pre-Approval Or Pre-Qualification?
For a home buyer, understanding whether you have home loan pre-qualification or pre-approval is extremely important in order to ultimately purchase the home that you’ve been searching for.
When submitting an offer for purchase, it’s imperative that you have a PRE-APPROVAL to submit with your formal offer to purchase form and REBNY financial disclosure. But you may ask, “What about a PRE-QUALIFICATION?” How is that different than a Pre-Approval?
The difference is significant. Prequalifying for a mortgage is based solely on what you disclose to the loan officer or broker about your income, credit score and total assets, including what is available for a down payment.
A pre-approval, requires borrowers to provide documentation of their income and their assets.
A pre-approval letter should include the amount a borrower is qualified to borrow, as well as the loan officer’s contact information. Some letters may have an estimated monthly payment. Experts say, details about the loan type and interest rate will not be included; Instead,, those are filled in when you are ready to receive the loan.
The lender typically pulls your credit report, and you should gather together almost everything you will need for the actual mortgage underwriting: W-2 wage statements; 1099s (which show things like dividends and interest income), recent pay stubs; bank statements; and statements from Individual Retirement Accounts and 401(k)s and other assets that could show you have the resources to buy and maintain a home.
At Wells Fargo, one of the country’s largest mortgage lenders, an underwriter will review your documentation and offer a general agreement to lend. It’s a real commitment to lend you the money necessary to purchase a home but still contingent upon review of your contract and appraisal.
Other lenders may treat pre-approvals as more of an opinion on the person’s ability to borrow, not a guarantee to lend. Generally, borrowers need to have chosen a property and have it appraised before they can expect a firm commitment from a lender.
When acquiring a pre-approval, borrowers should ask the lender to also provide a TILA-RESPA disclosure form outlining closing costs and fees along with the pre-approval. Many will provide this only once you have a home under contract. Consult with your mortgage professional regarding TILA-RESPA guidelines and compliance when obtaining a pre-approval.
TIMING YOUR APPROVAL
One might ask, “When is the best time to obtain a pre-approval?” Timing is important. Buyers should aim for obtaining a preapproval letter from a lender within 60 to 90 days of the expected closing date. That is because some letters expire in 90 days or so. Your income and bank statements may also need to be updated if it has been a few months between pre-approval and the signed contract for buying.
Nothing seems to trip up homebuyers more than pre-qualification agreements.
Often confused with a loan pre-approval, the pre-qualification is an estimate of how large a mortgage you can afford, based on your financial situation over the past two years. This qualification is based on representations made by the borrower. This is useful when you first start shopping for a new home but you will need a pre-approval in order to submit any formal offers to purchase. So, when the time comes to get serious about purchasing a property, consult with your loan officer and obtain a pre-approval.
Here are a few tips to surviving the mortgage process:
UNDERSTAND THE DIFFERENCE. First-time homebuyers tend to think pre-qualifications and pre-approvals are one and the same, but they’re not. See above to understand the difference.
RESEARCH YOUR LENDER. It’s important that you find a mortgage lender that puts you at ease, is experienced in the industry and can explain the process clearly. They will act as your lending advisor and coach throughout the process so it’s important that you trust that individual and can communicate in a way that’s beneficial for you both.
OFFER AN ACCURATE PICTURE OF YOUR FINANCIALS . Be as forthright and accurate as possible. Tell your lender everything they need to know. Failure to disclose important details can potentially cause major issues during the mortgage process..
PURSUE MULTIPLE MORTGAGE BIDS. You are in no way obligated to work with the lender who provides you your pre-qualification. We actually encourage receiving bids from up to three different lenders, weighing the pros and cons, and then make an educated decision. If needed, we are happy to refer lenders from our trusted network of providers.
PREPARATION IS KEY. The more prepared you are going into the process, the more precise the lender can be in offering terms, rates, fees,etc which ultimately will reduce the potential stress involved in obtaining a mortgage. Your goal is to show an accurate, consistent financial picture over the last 2-3 years. Here’s what you will need:
Last (3) month’s pay stubs
Last (3) Month’s Bank Statements
Last (2) years tax returns, 1099’s , and W-2’s
Proof Of Employment Stating Salary, Position and Length Of Employment (must be written on company letterhead and signed by a supervisor with their respective contact information included)
Lastly, be prepared, transparent, and trust your team. Even with all these factors accounted for, the process can be stressful. Lean on the team that you have chosen, heed their advice and you will ultimately achieve what you set out to accomplish: the goal of securing the home of your dreams.