What is a pre-approval?
This is a written commitment from the lender or bank to signify that the borrower is qualified for a specific loan amount after an extensive check on the prospective borrower’s income and credit information. You can present this letter of pre-approval to the seller to express that you are serious in your intention to purchase a home. These pre-approval letters are valid for up to 90 days.
Why is it necessary to get pre-approved?
The true essence of getting pre-approved is to get an estimate of your home purchasing power. During this stage, the lender will discuss the specific amount that you are allowed to borrow with the corresponding interest rate. This will enable you to know ahead of time how much you can afford. It can also serve as a gauge on the type of home that you should be searching. It also gives you an edge over other home buyers, because sellers will take you more seriously because of a pre-approved loan. In addition, properties sequestered by banks require a pre-approval letter before a mortgage is processed.
What is involved in getting a pre-approved contract?
You need to approach a lender who will issue a pre-approval letter. The process takes one to two days, provided that you supply complete documents required by the lender.
Here are documents needed to process a pre-approval letter:
- W2 record from the past two years
- Paystubs for three months
- Copy of your income tax returns from the past two years
- Bank statements (checking or savings account) for the past three months
- Statement of assets (such as bonds, stocks or retirement accounts) for the last two months
- Contact information of your landlord (for renters)
- Current mortgage documents (if any)
- Divorcee decree (if applicable)
- For self-employed individuals:
- Business tax returns for the past two years
- Year-to-date profit and loss statement
- Year-to-date balance sheet
Credit Report and Credit Score
These documents will be required by the lender, who will request them in behalf of you (and your co-borrower, if you have one). They will bill you around $30 to process the documents. The lender will scrutinize your credit report for any debts or missed payments. Meanwhile, your credit score will have a significant bearing on whether you will get approved for a loan or not. You will get a favorable mortgage rate if you have a credit score of more than 720.
What if I can’t get pre-approved?
You need to correct errors on your credit report in order to improve your credit score. You can also bring down your overall debt to enhance your debt-to-income ratio. Another option is to bulk up on your down payment to increase your chances of getting approved.
The lending marketplace is a wide field, so don’t just focus on a single lender. Check out other lenders to have points of comparison and give you the best loan rates.
Are you ready to buy? Do you have more questions?
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