While searching for your new home can be exciting, there’s one important step you should take first: getting pre-approved for a mortgage.
Surprisingly, there are many buyers out there who don’t understand why it’s important to get a pre-approval. And, although it’s not technically ‘required,’ there are a variety of benefits to getting pre-approved before starting your home search. Not to mention, it could save you from potential obstacles down the road.
If you are looking to obtain a mortgage this year, it’s important to first understand what mortgage pre-approval does, and how to boost your chances of getting one.
Pre-qualification vs. Pre-approval
Mortgage terminology can be confusing. For example, you’ve likely heard the terms ‘pre-qualification’ and ‘pre-approval’ used interchangeably—but they are not one and the same. Since one of the most important steps to becoming a serious buyer is understanding the mortgage process and how it works, let’s take a look at the difference between these two terms.
For starters, think of it this way: a pre-qualification is like an audition, whereas a preapproval is the rehearsal for your loan application. That’s because prequalifying means you’ve simply been screened by a lender, and typically only requires a quick phone call to a mortgage broker. Based on some basic information—such as finances, income and debts, etc—the lender will then provide a rough estimate of what you might be able to afford. While pre-qualification will help get your foot in the door, pre-approval is what gets you the house you want.
Pre-approval requires a formal application to be completed with the lender where you, the borrower, supplies more in-depth personal information, so a lender can do a hard credit check.
As a result, pre-approval is the first legitimate step to begin your loan process. With a preapproval letter from your lender, real estate agents and sellers know you are a serious buyer.
What Documents Will You Need?
To demonstrate your financial history and reliability, you will need to provide certain information when applying for pre-approval.
This list of documents includes:
● 60 days of bank statements
● 30 days of paystubs
● W-2 tax returns from the previous two years
● Schedule K-1 (Form 1065) for self-employed borrowers
● Income tax returns
● Asset account statements (retirement savings, stocks, bonds, mutual funds, etc.)
● Driver’s license or U.S. passport
● Divorce papers (to use alimony or child support as qualifying income)
● Gift letter (if funding your down payment with a financial gift from a relative)
Consider creating a folder in Google Drive, Dropbox or a tangible folder with hard copies to make sure everything you need is all in one place.
Why Pre-approval Matters
Surprisingly, real estate and loan professionals say it’s common to come across buyers who skip the preapproval process. However, most sellers are unlikely to even consider offers from buyers who don’t have a pre-approval letter from a lender. Especially in a competitive market, you should do all you can to stand out in a sea of other borrowers—and getting pre-approved is one of the best ways to do that. Not only does it show you are serious about buying, but it can also set you apart from those who may have skipped pre-approval.
By getting pre-approval out of the way first, it can also reveal any potential issues that could prevent you from getting a home, and give you ample time to fix them. For example, finding an error on your credit report is much less costly during pre-approval than when you’ve already found a home.
Though some buyers may put off the pre-approval process—because they are eager to start shopping around or they fear a lender may not approve them—pre-approval can sometimes take as little as 24 hours. If all your documents are in line and your information checks out, the process is relatively simple.
Are you looking to purchase a home this year? At USA Mortgage, our team of licensed loan professionals is here as your resource to help refinance your current home or help purchase a new one. For more information, stop by a USA Mortgage branch near you, visit our website or call us toll-free at 888-250-6522.