With interest rates still historically low, you and other potential homebuyers are all vying to secure mortgages while economic conditions are generally favorable. However, this process is not one that doesn't happen quickly
Luckily, a process exists that allows you to speed the time needed to secure a loan. However, if you do explore this option, keep in mind that pre-approval differs from pre-qualified, another option for potential homebuyers.
What is pre-approval?
A mortgage pre-approval is when a broker or lender states they've reviewed your finances and will let you borrow a specific amount of money once you find a house. Lenders base their decision off of your credit information and income level.
It's important to remember that a pre-approval does not guarantee a loan. Lenders may require additional income or asset verification.
This written statement typically lasts for a period of 60 to 90 days, but are subject to changes or cancellation if certain factors change, such as your income.
Why is pre-approval a good option?
According to Redfin, the pre-approval process is a smart option to explore, especially early in the homebuying process.
By getting a pre-approval, you know exactly the price range you can afford. Remember, a mortgage is not the only cost associated with owning a home, as you may still need to account for a home inspection. Not only will this prevent you from stretching your finances relatively thin, but you can shop around for houses in your price, meaning you don't waste time looking at houses you will never end up buying.
Furthermore, once you have a pre-approval, you can make an offer even faster once you find a house. This will come in handy if the neighborhood you're looking to live in is trendy, and homes are a hot commodity.
For real estate agents, a pre-approval signals the prospective buyer is credible. Some bias may be experienced if you make an offer on a house, but are passed over in favor of of someone else who has pre-approval.
How to qualify
Pre-approvals require plenty of information. To start, lenders will ask for your Social Security information, as well as a credit report. If there will be a co-borrower, he or she also has to submit this information as well, Zillow stated.
Every lender is different and may have various standards and processes for helping you obtain a pre-approval.
Numerous tools exist to help you find a lender that will help you get pre-approval. Try using an online tool, which will find a local lender for your needs.
Pre-approval vs. pre-qualification
Pre-approvals carry more weight than pre-qualifications. This stems from the amount of information required, which compared to pre-qualification is quite a bit.
For example, pre-qualifications typically result from a conversation between you and a lender or broker. This option can be ideal if you're simply exploring your options, and are trying to figure out a mortgage you can afford and which ones you may qualify for.
A casual conversation does not compare to the amount of information required for a pre-approval. As such, a pre-approval will carry more weight and, overall, look better.
Steps moving forward
If you have a strong financial history, the pre-approval process should not result in any hiccups. However, if your background is less than stellar, you may run into some difficulty. Don't get discouraged, but instead, work to improve some key areas.
Start with your credit score. Work to pay off any existing credit card debt and try to avoid obtaining new forms of credit before purchasing a house. Generally speaking, try to maintain a debt-to-income ratio of 36 percent. Eliminating debts will help increase your credit score, and in most instances, a score of 720 or above will help you secure favorable mortgage rates.
Likewise, be sure to fix any errors you might have noticed on your credit report, because these can have a big effect as well.
Finally, you can increase your chance of qualifying for a pre-approval by increasing the amount of your down payment.
Buying a house is a long process and involves many moving parts. The entire experience can be overwhelming and may lead to some mistakes. To get a leg up on fellow buyers who may be eyeing the same house as you, obtain a pre-approval. Doing so will help you get a mortgage, and eventually, the house of your dreams.
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