In real estate markets where competition is tight, it’s hard to stand out as a buyer unless you pay in cold cash. How do you make the sellers turn their heads your way? Obtain a mortgage preapproval from a lender. It’s that letter that tells real estate agents and sellers that you’re serious about buying the home with the ability to obtain financing in tow.
But I’m already prequalified for a loan, does that mean I’m preapproved?
There’s a big difference between prequalification and preapproval in the mortgage process. Getting prequalified is like going through an initial screening process set by a lender. You’ll be asked for basic information and the lender will give you a rough estimate, a ballpark figure on how much you can borrow.
A step further is getting preapproved. It is a more in-depth review of your financial and credit information for the lender to determine: (i) if you qualify for a loan (thus you need to meet their credit, debt-to-income and other standards) and (ii) if so, how much will they give you.
You can fill out a preapproval application online but you still need to produce certain documents for verification, including but not limited to:
- Income: Pay stubs for the past two months, Form W-2 statements, etc.
- Employment: Information about your employers for the past two years. If you’re self-employed, loss and profit statements, tax statements and balance sheets for the last two years.
- Address: Your residence for the last two years. Other lenders may require a list of your previous residential addresses.
- Assets: A list of stocks and bonds and other investments.
- Cash reserves: These include statements of your bank accounts (savings, money market accounts, checking).
- Monthly expenses: An itemized list of your monthly expenses, including debts.
- Gift letters: If you received gifts from relatives and loved ones for your down payment, the lender will check if indeed these are gifts that require no repayment.
So what happens if I get preapproved?
Congratulations! You just made your house-hunting and buying so much easier. That preapproval letter will strengthen your bid on the property you want to buy. From a seller or real estate agent’s point of view, this means you are a serious buyer and they might just be more willing to work with you.
Getting pre-approved is a leverage you can use in buying and even negotiating the sale price.
More importantly, a mortgage preapproval is the closest you can get to securing a home loan. Your next goal should be to reach the final approval stage. This happens after you’ve chosen a property to buy, made an offer, and entered into a binding purchase agreement with the seller, which contract you have to submit to the lender.
In the approval stage, the lender will require an appraisal of the property. You also need to decide on a mortgage program, based on the approximate amount you qualify for, with a corresponding rate commitment from the lender. The final approval of the loan is contingent on your ability to meet the lender’s requirements to close the loan.
A tip: A mortgage preapproval letter has an expiration date (usually 60 to 90 days). This takes into account changes in finances, credit and other circumstances that could complicate the loan closing. So keep your financial condition in check and work towards further improving your credit to avoid unnecessary complications.