Getting Pre-Approved for a mortgage is your first step in buying a home.
A decade ago it was a Buyer’s market and few Borrowers bothered to be Pre-Approved. Most buyers were only Pre-Qualified at the time they made an offer on a property. The past few years have been a Seller’s market and almost all Borrowers became Pre-Approved prior to shopping for a property.
The difference between Pre-Qualification and Pre-Approval is significant. Pre-Qualification is a letter or verbal statement from a Loan Officer, asserting that based upon their conversation with you and a credit check, you should be able to get the mortgage you are looking for.
Pre-Approval is an underwritten approval for the loan you are requesting. You apply for a mortgage with all the documentation, as if you already had a property and were applying for a mortgage, just without a property. Upon Approval, you are issued a Pre-Approval or Commitment Letter stating the loan amount and the terms of your loan Approval.
Companies that advertise that you can be “Pre-Approved” in twenty minutes over the phone have mottled the line between Pre-Approval and Pre-Qualification. You cannot be Pre-Approved for a loan you have not applied for. They are really advertising Pre-Qualification versus Pre-Approval. This is similar to the “Pre-Approved” credit card offers you receive in the mail that you then have to apply for.
Many real estate agents will not work with buyers that are not Pre-Approved. Many Sellers will not accept offers from buyers that are not Pre-Approved.
Many buyers that are not Pre-Approved are surprised by the true costs of getting a mortgage after they have an accepted offer.
There are conditions that your Pre-Approved Loan is subject to. The most important condition, finding a property.
Pre-Approval has many benefits:
1) When you meet with the Loan Officer to take your application, the mortgage process, the costs involved, and your financing options will be explained to you. With that knowledge and understanding, you can make an informed decision on properties versus shopping for your home blindly. 2) Many difficulties in your mortgage situation can be resolved prior to your purchase, preventing surprises that could delay or even cancel your purchase. 3) Your offer on a property increases in standing with a Pre-Approval, as the Seller knows you are approved for the required financing to close the transaction.
The Steps in getting Pre-Approved and Purchasing a property are as follows:
Step 1 – Call Your Loan Officer
Step 2 – Apply for Your Mortgage
Step 3 – Get Your Pre-Approval
Step 1 – Call Your Loan Officer
Call your Loan Officer to schedule an appointment to apply for your mortgage. The Loan Officer can usually meet you at your home. During the initial conversation, the Loan Officer will ask you a number of questions to get an idea of what your goals are.
These questions will include:
1) What type of property you wish to purchase? 2) What you would like to spend? 3) What you plan as a down payment? 4) Where you work and what your income is? 5) What your goals are? 6) Your Social Security number, so the Loan Officer can bring a credit report with them to your mortgage application meeting?
Based on your answers, the Loan Officer will tell you which documents you need to gather for your mortgage application meeting.
For a standard list of documents, go to http://www.mtgmortgages.com/documentation.htm
Step 2 – Applying for the Mortgage
During your application meeting, the Loan Officer will again ask questions to fully understand your goals in purchasing a home. Both your long-term and short-term housing and financial plans are important for the Loan Officer to recommend the best loan program and terms for your situation.
There are hundreds of different types of mortgage programs. The question is which is the best program for you.
The Loan Officer will show you and explain your credit report. Credit is the single most important aspect of qualifying for a mortgage, as your credit scores dictate which mortgage programs you qualify for.
The Loan Officer will then analyze your pay stubs, W-2s, bank statements, and other documentation, to determine the best mortgage program to meet both your goals and your qualifications.
The four main aspects an Underwriter uses to determine a borrower’s qualifications for a mortgage are:
- Character (Credit) – What is the borrowers character in paying their obligations? A credit report is used to determine a borrower’s integrity, as past behavior is a good indicator of future behavior.
- Capacity (Income and Debt) – What is the ability of the borrower to produce enough income on a constant basis to repay their debts? Income, current debt, and job stability are analyzed.
- Capital (Savings) – What is the ability of the borrower to budget and save? Savings shows not only that the borrower can budget their income, but savings also gives the borrower capacity to repay the debt in case of financial duress.
- Collateral (The Property) – The property serves as collateral for the loan. An appraisal will be performed to determine the property’s ability to serve as collateral for the loan. The higher the percentage of down payment to the loan amount, the lower the Loan to Value (LTV), the better the collateral and less risky the loan.
Your Loan Officer will explain the mortgage program, the estimated interest rate, the estimated monthly payment, and the estimated closing costs and pre-paid expenses.
The mortgage process will be explained to you. After all your questions have been answered, the Application and Disclosures will be filled out and signed.
Your loan application will then go into Processing, and onto Underwriting. A Good Faith Estimate and Truth in Lending Disclosure will be mailed to you in three business days.
Step 3 – Your Loan Approval
After your application has been underwritten and approved, your Loan Officer will call you and an Approval Letter/Commitment Letter will be mailed to you. We can also fax the Approval to your real estate agent.
An Approval Letter always has conditions that it is subject to. As you do not have a property yet, anything related to the property cannot be done until you have a signed Purchase and Sale Agreement.
The Approval will also be subject to updated documents and credit. As it may take you several months to find a property, your documents will age and need to be updated. Unless your situation changes for the worse, this is merely replacing your old documents with new ones.
Now that you are approved for the best mortgage for your situation, it is time to work with your real estate agent to find the right home for you.