Here at Solutions we get many questions from our Buyers about how to best prepare ahead of time for purchasing their dream house. Our local housing market has very low inventory right now, so, when a great listing comes on the market that is in the right location and is priced well, you can almost guarantee that you will have to compete with other Buyers for the home.
At Solutions, we typically recommend that our Buyers get a pre-qualification letter ready in case they want to make an offer right away. But, to go one step further, with a pre-approved loan from a lender, you’ll give yourself a head-start in the race for a home you love.
Pre-approval also comes in handy as a first-time homebuyer when you’re just dipping your toe into the market.
What is a pre-approved loan?
Every potential homebuyer should start the process of looking for a home with a visit to a reputable mortgage lender – at Solutions we work with several local and national lenders and are happy to provide you with referrals.
While a lender can give you a pre-qualification letter for a home loan based on your credit score and your stated income and assets, a Seller also might want to see you’re completely pre-approved for a loan. This can make the whole home buying experience go smoother.
When you’re pre-approved, Sellers are more likely to accept your offer, and — by knowing what you can afford — you’ll know what homes to look at. And it doesn’t have to be a hassle either.
A pre-approval requires complete documentation of your finances. Be prepared to provide these piece of information:
A review of your credit report
Verification of your income and employment history
A calculation of your debt-to-income ratio based on your gross monthly income and the minimum payment on all recurring debt.
Get Your “Pre-Approved” Facts Straight
Applying for a pre-approval doesn’t require nearly as much paperwork as applying for a mortgage, but you’ll still need to be as accurate as possible if you want to make sure you’re getting the best deal—and the most offers.
Start by gathering the information you’ll need:
- Estimated purchase cost. If you have a home in mind, look up the seller’s asking price to get an idea of how much you’d need to borrow.
- Down payment amount. Knowing how much you can put down will have a big effect on your pre-approval.
- Personal information. You’ll need basic info like Social Security numbers and driver’s license numbers for anyone on the application.
- Proof of income. Gather recent paystubs, tax returns and paperwork from your employer.
- Proof of assets. Gather bank statements, retirement accounts, CDs and other documents showing your assets.
Estimate Your Credit Score
While any prospective lender will pull your credit score, you’ll also be asked to estimate your credit score on your application.
To make things easier, you can order a copy of your credit scores for a small fee from one the three credit bureaus —Equifax, TransUnion and Experian — before you apply for a pre-approved loan. By law, you’re entitled to one free credit history report a year from each of the credit bureaus.
You can also use your credit report to make an educated guess about your credit scores. For example, if you have low-to-no debts, active credit lines and a history of timely payments, you probably fall in the “good” credit score range.
Once you have your information and credit scores together, you have some options to apply for a pre-approved loan. If you have a particular lender in mind, you can visit the lender’s direct website to see if you can apply online or meet the lender in person.
Many lenders have this on-line feature, but you’ll have to fill out an application for every lender you want to use.
Your lender will review your documents and discuss loan options with you, so you’re prepared to close as quickly as possible once you have a signed contract. The pre-approval will be based on all elements of the home loan other than the specific property you intend to buy.
Your lender will tell you the maximum loan amount you can qualify for, but you should also be certain you understand the monthly payments associated with each loan — including homeowners’ insurance and local real estate taxes.
After you have a pre-approved loan letter in hand, it’s important to maintain the same credit profile so that you can be certain that your loan approval is valid.
Be sure to keep a paper trail of all unusual deposits and pay your bills on time – we have talked about this in a previous blog. Don’t apply for new credit, close any credit cards, or take on new debt — these actions can impact your credit score and force your lender to re-check your credit before closing.
How a pre-approved loan can help you compete
If you’re competing with other Buyers, a mortgage pre-approval makes your offer stronger. While many Buyers today might also have a pre-approval handy, you can use yours to win the bidding war by providing a financial statement along with a pre-approval letter from your lender with your offer.
If your pre-approval letter is for an amount above the asking price for the home, this will give the Sellers confidence in your ability to easily finalize the loan. You also can ask your lender or Solutions agent to call the listing agent directly to emphasize your ability to close the deal and to discuss how quickly the contract can go to settlement.
Most real estate contracts include a contingency: the offer depends on the Buyer obtaining financing. If you have a strong pre-approval letter and feel your lender is dependable, you can remove the financing contingency or shorten the contingency term.
Sellers are happy to see an offer without a financing contingency, because it proves the Buyer has confidence the loan will close on time. Waiving this contingency, however, can be risky because if your financing doesn’t come through you could lose your earnest money deposit and even run the risk of being sued by the Sellers.
A shorter contingency might be safer and still garner you the attention and confidence of the Sellers in a competitive situation.