You might recall the American Express commercial that warns “Don’t leave home without it.” Regarding a mortgage pre-approval, “don’t buy a home without it.” As a matter of fact, in most real estate markets you can’t even make a purchase offer without it.
Unless you’re paying all cash, it’s an easy decision. You must get a mortgage pre-approval to start looking seriously for a home. Most Realtors® will show a few homes to a buyer without a pre-approval letter, but you’re pressing your luck beyond that. “Trust but verify” eventually rules the day.
Pre-Qualification vs. Pre-Approval
An important distinction must be made between pre-qualification and pre-approval. They both help inform you about your financial standing, but they are not the same.
What’s a Mortgage Pre-Qualification?
A pre-qualification typically relies on a credit check and self-reported financial information. It’s only a general indication of whether you could be formally approved for a mortgage and can usually be obtained over a phone call or completing a brief online application.
As a result, being pre-qualified for a mortgage provides only a ballpark estimate of your loan amount and interest rate. It’s much less reliable than a pre-approval, which usually involves a thorough review of bank statements, income sources, and other documents.
What’s a Mortgage Pre-Approval?
The pre-approval process is more involved than a pre-qualification. The lender will carefully review your credit history, income, assets, and debt, such as credit cards and auto loans.
They will then issue a pre-approval letter, which specifies the maximum amount you can borrow, the interest rate, and minimum down payment. The letter is typically good for 90 days.
A mortgage pre-approval letter from your lender assures sellers and Realtors® that you have the ability to complete the purchase of any home meeting the lender’s parameters.
Documents Needed For a Mortgage Pre-Approval
To obtain a mortgage pre-approval, you must complete a full mortgage application and submit all required documents. These can include, but not limited to:
- Personal Identification (driver’s license, state ID card, passport)
- Social Security Card (number needed to run a credit check)
- Pay Stubs and W-2s (2 years)
- Tax Returns (2 years if self-employed)
- Bank Statements (2-3 months)
- Investment Accounts (401(k), IRAs, stocks, bonds, etc.)
- Financial Statements (if self-employed)
- Debts (recurring payments like rent, auto loans, student loans, credit cards, etc.)
- Down Payment Gift Letters (proof that cash doesn’t have to be repaid)
- Letters of Explanation for credit dings
- Divorce Decree (if you pay or receive child or spousal support)
The Pre-Approval Process
The mortgage pre-approval process involves several important steps. Here’s a breakdown:
Submit financial documentation: To begin the loan pre-approval process, a prospective homebuyer will need to provide financial documentation to the lender. The mortgage lender will pull the buyer’s credit report. See the above list of documents.
Work with a loan officer: Once the mortgage lender receives the financial documentation, a loan officer will evaluate the homebuyer’s financial situation and creditworthiness. The loan officer will help determine how much the homebuyer can borrow and what loan programs are in play.
Review the 4 Cs: To evaluate a homebuyer’s borrowing power, lenders use the 4 Cs (not for diamonds) – capacity, capital, collateral, and credit. Capacity refers to the homebuyer’s ability to repay the loan; capital refers to the amount of cash available for a down payment and closing costs; collateral refers to the value of the home being purchased; and credit refers to credit history.
Receive a pre-approval letter: Once the loan officer has evaluated the homebuyer’s financial situation, the pre-approval letter will be sent to buyer and Realtor®.
Begin the home search: Armed with that sweet pre-approval letter, the homebuyer can focus on a price range and search homes with confidence.
Alternatively, it’s a total bummer when a buyer finds the perfect home then rushes to get pre-qualified, only to find out the price is slightly out of reach.
Benefits of Getting Pre-Approved
Getting pre-approved for a mortgage is an essential step in the home-buying process that conveys several benefits to prospective buyers. The main benefits are:
Budgeting: A mortgage pre-approval provides a home buyer with a crystal clear picture of the monthly loan payments and down payment. Buyers can then avoid wasting time and energy looking at properties they can’t afford.
Credibility: As mentioned before, a missing pre-approval letter is a non-starter in many real estate markets. You won’t necessarily have an edge over other home buyers unless you qualify for a conventional loan vs. an FHA or VA loan, which have more restrictions.
Timing: Since much of the financial documentation and evaluation is done during the pre-approval stage, the actual loan process is streamlined, making the overall transaction faster and more efficient.
Awareness: Going through the pre-approval process can help homebuyers understand the costs associated with obtaining a mortgage, such as the interest rate, mortgage insurance, down payment requirements, and closing costs. This can help minimize surprises later in the home-buying process, which usually occurs at the worst time.
Working with a Realtor®
Realtors® can be your greatest resource because they can refer lenders with whom they’ve worked, and know first hand that those lenders close deals even when issues arise. Just like bad real estate agents, there are bad lenders, which can waste a lot of time and end in frustration. Realtors to the rescue!
Wrap It Up
Mortgage pre-approval is an unavoidable step in the home-buying process that helps all parties involved in a home purchase. It helps home buyers nail down their budget and avoid falling in love with homes that exceed their price range. It also instills confidence in Realtors® and sellers, and drastically reduces mortgage underwriting problems during the escrow period.
Contact PropertyWonk’s experienced team to connect with a top Bakersfield lender and/or Realtor®.
