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Why You Need Pre-Approval
Here are just a few things pre-approval allows you to do:
Appeal to sellers – For those itching to get their house-hunting started, getting pre-approved for a loan can seem like a drag. We admit it’s not the most glamorous step toward homeownership, but sellers likely won’t consider you without seeing your pre-approval letter. Being pre-approved for a mortgage alerts the market that you are a capable buyer. Without it, good luck convincing real estate agents and property owners to fit you into their packed schedules. This is especially true in a hot market, like Nashville, where demand is so high that sellers can afford to be selective.
Establish your budget – After you’ve completed your pre-approval application, lenders will analyze your finances and provide you with a letter that documents the highest amount they are willing to let you borrow. Knowing your maximum loan amount helps you establish your price range, so you won’t waste time considering homes that just don’t fit your budget.
Audition Potential Lenders – This is just the beginning of your relationship with a lender. The stakes only get higher once you have your dream home under contract, and you need final approval of a loan to successfully close. Seeking pre-approval through multiple companies exposes you to the available loan options, and gives you the chance to see how different lenders engage with their customers before you commit to one of them for the long haul.
Locate your weak spots – If there are any flaws in your financials that might prevent you from securing the loan you want, the pre-approval process will help find them. It’s no shame to have a few blemishes. If you do need to rehabilitate your credit score, debt ratio, or some other area, it’s best to go ahead and find out. Some people even get pre-approved months before they start their home search, so they can gear up for the process of securing a mortgage. Before they get in touch with a lender, however, they might want to…
Contact a Real Estate Agent
The fact is you’re going to want a real estate agent anyway, so why not find one in time to help you get started securing your mortgage? This isn’t a prerequisite to the lending process—in fact it may not cross the minds of many buyers—but having a good real estate agent can be a shortcut on your home buying journey. Pre-approvals are valid for only 60-90 days, so there’s limited time to close on a home before you’re facing the pre-approval process again. Having your real estate agent already in place allows you to jumpstart your home search as soon as the pre-approval comes through.
Real estate agents can also help you decide when to buy a home. Especially in a place like Nashville, where the housing market can get awfully competitive, finding the right home at the right price often comes down to timing. Real estate agents can match your pre-approval to a time when the market is most favorable to your home search.
Perhaps the best reason to contact a real estate agent, though, is to put their network of lenders to work for you. Good real estate agents have a rolodex of reliable lenders to fit your specific situation. They can connect your pre-approval with the companies most likely to offer you a larger loan, and best suited to take you through the entire mortgage process. You can use the time an agent saves you, vetting lenders, to focus on more important things, like whether that ranch’s walk-in closets are really as big as they look. Once you’ve found a real estate agent (or decided to go it alone), it’s time to…
Get Pre-Approved For Your Home Loan
Step 1: Identify potential lenders – A real estate agent can easily provide you with a few acceptable options for getting a pre-approval, but if you aren’t ready to access their services, there are plenty of ways to choose a lender. The goal is to find trustworthy companies that have a reputation for smooth and professional service. You might contact a bank or credit union with which you already have a relationship. If you know someone who recently bought a home, ask them about their experience securing a loan. You could also enlist a mortgage broker to steer you to potential lenders.
Fortunately, engaging a lender in the pre-approval process does not constrain you to borrow from them. Some buyers seek pre-approval from as many as ten or more lenders to unearth the best loan offer. This is a fine strategy, and as long as you contact every lender within the same 14-day period, it’s still just a five-point hit on your credit score. However, if you want to save some time and money (some lenders charge an application fee of $300-$400), limiting yourself to three mortgage companies usually still generates a broad range of loan options.
Step 2: Submit your pre-approval application – Although there’s nothing wrong with visiting a bank in person, it’s usually easiest to log onto a lender’s website and submit your application online. The application normally takes 45-60 minutes to complete and will ask you to show your:
- Proof of Income – To establish your employment and economic stability, lenders usually require you to provide the last two years of your W-2 statements and tax returns, your last two pay stubs, and your employer’s contact information. If you’re self-employed, the application will likely require additional verification documents, such as bank statements, balance sheets, an accountant-signed statement, and a profit/loss statement. Lenders will use your income to establish your Debt to Income Ratio (DTI). This is essentially a measurement of the portion of your monthly income devoted to paying off debts. Any DTI over 43%, meaning that over 43% of your monthly income goes to debt repayment, puts you in jeopardy of being denied a pre-approval.
- Proof of Assets – To verify that you have the available cash to cover a potential mortgage and down payment, lenders ask for your checking and savings account numbers and balances. They’ll also require documentation of your assets, including Stocks, CDs, and retirement accounts.
- Credit Information – Although lenders will definitely pull your credit report and credit score, they might also ask that you provide information on your outstanding loans, like car payments or student debts. Lenders want to confirm that you habitually pay off your debts and that you have a history of responsible credit usage. To get a conventional loan, you’ll usually need a FICO credit score of at least 620. The higher your credit score, the lower you can expect your interest rate to be.
- Gift Letters – It’s likely that your loan product allows for a substantial gift from a family member to serve as part of your down payment. For this to be acceptable, you’ll need to provide a letter in which you and the gift-giver establish that the amount isn’t actually a loan that you’ll be expected to repay.
- Monthly Expenses – A lender might ask for a breakdown of your specific monthly spending to assess if a mortgage fits within your budget.
Step 3: Wait for your application to be processed – Within one to three days, your lender will let you know if you’ve been outright denied, pre-approved, or pre-approved with conditions. The last response often requires that you provide more documentation or improve some aspect of your application to qualify for full pre-approval. In the event of a denial, the lender must clearly justify their decision and offer resources to help you remedy your situation. If you do gain pre-approval, you’ll receive an official pre-approval letter that contains information like your purchase price, interest rate, and loan amount. This document you can proudly present to sellers (especially the one with that three-bedroom ranch), to show them that you’re just the buyer they’ve been looking for.
If you have any questions about the lending process, or just want to talk about your own housing search, you’re always pre-approved to contact Felix Homes. Give us a call at 615-422-4277, or send us an email at email@example.com to find out how we can guide you through your next home buying challenge.