What is a Pre-Approval | Why it's Important

What Is a Pre Approval? 

The Starting Key (Loan Pre Approval)

Pre Approval is one of the most important steps in your journey to find your next home. It doesn't matter if this is your first home or your 7th home. Having a pre-approval letter is your ticket to finding your ideal home. In this article, we will go over the most important reasons why a pre-approval letter is vital to a stress-free home search. We will even show how having a pre-approval will save you time and help you avoid the headaches that many would-be homeowners run into.

What Exactly Is Pre-Approval?

A pre-approval is essentially a lender stating that you can purchase a home for a specific price based upon the qualifications. Those qualifications are based on your credit history, banking history, employment, and income history.

The Pre-Approval Process

A pre-approval for a loan requires a few steps. Lenders will require several documents, and there are many things that you must do. Luckily, the documents you will need aren't hard to get.

(1) The lender will pull your credit report. The lender's process is to pull 2 of 3 credit reports from the big three credit reporting agencies and average these two scores and use this average as your credit score. Why do they do this? Lenders do this because not all creditors report to every credit reporting agency, so information found on one credit report won't be found on another. Averaging your credit scores gives them a more accurate figure to work with.

(2) Your credit score is so important to the process because it will determine what type of loan product lenders will push you towards. There are different credit products and loans for those who have bad credit, average credit, and good credit. Your credit score will determine how much money lenders will qualify you for. It will also determine your interest rate, which plays a huge role in how much you will pay every month and over the life cycle of your mortgage. This is why taking care of your credit is so important. 

Pro Tip: If you apply for multiple mortgage loans in the span of 14 days, then your credit will only get 'hit' once with a hard inquiry. You want to avoid having too many hard inquiries (hard pulls) on your credit because it will affect your credit score

What is a hard inquiry?

A hard inquiry or "hard pull" is when a lender or creditor pulls your credit, which causes a -5 point reduction of your credit score. You want to limit the number of hard inquiries on your credit. 

Best Practice: The most important carry away from this is to take advantage of the 14-day window where multiple pulls on your credit report will only count as one hard inquiry. So, use this time to apply to as many lenders as possible because it will not harm your credit score. Outside of this 14-day window, you can harm your credit score and your ability to qualify for a loan, to get good lending terms, to get a favorable interest rate, and to save money.

Top Time Saver Tip: Most lenders pretty much all ask for the same form of documentation. You can save yourself a lot of time by already having this information pulled and prepared for them. Keep a file of everything that they are likely to request, have multiple copies on hand, and create a folder with these documents.

What Type of Documents Will Lenders Require? 

Lenders will demand that you supply the following information:

(1) Two years of tax returns

(2) Bank Statements

(3) Paycheck Documentation.

Supplying your tax returns is straightforward enough for most people who have a standard job and only requires two years of W2 filings. For self-employed people, who might work in non-traditional industries, it could demand that they supply 1099s and other tax documentation to show their income history. Lenders require bank statements because they need to know if you are financially solvent, have enough liquidity to afford a home, and pay a mortgage every month. Paycheck documentation could fall under bank statements, but most people receive a paycheck. Providing income is an important factor in how much money a borrower can afford to repay and borrow. 

What Are The Benefits of A Pre-Approval Letter?

(1) Sets Realistic Expectations

 It will keep you from wasting your time looking at homes that are beyond what you can qualify for via a loan. It keeps you from looking at homes outside of your price range.

(2) Gives Power To Your Offers

Increases the chance that a seller will accept your offer. Take a moment to think as a seller would. Suppose you are receiving several offers from many interested potential buyers. What type of criteria would you have and would make an offer more or less appealing? An offer from someone with a pre-approval from a lender shows that they are serious, can afford the house, and are not just a dreamer. Believe it or not, many people make offers on homes they have zero chance of ever being able to afford or to receive a loan for. Your pre-approval letter pushes you to the top of the line.

Conclusion 

As you can now see, pre-approval is an important aspect of applying and qualifying for a home mortgage. Having a pre-approval letter also shows sellers and real estate agents that you mean business. It shows that you are not just out dreaming big, but that you have done the preliminary work and can prove how much money you can afford to spend on a home.

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