It is one of the most common questions first-time homebuyers ask: What is pre-approval? Simply put, mortgage pre-approval is a document that shows how much a lender has approved for you to borrow. It shows the real estate agent and seller that you are a serious buyer who can take out a mortgage on a potential property.
Although it does not guarantee a home loan, a pre-approval letter can help you stand out in a crowd of other buyers, and it may help you more easily close on a house.
Do you need a pre-approval?
After answering the question “What is pre-approval?”, many homebuyers wonder whether they actually need to acquire it. The short answer is that a pre-approval is not required to look at properties and put in an offer. However, Finance of America Mortgage’s mortgage advisors recommend getting one for several reasons.
First, pre-approval shows sellers you are serious about buying a home and have the financial means to do it. Sellers are more likely to select an offer with a pre-approval attached to it, especially if they have received multiple similar offers.
Second, although it is not the final step in the mortgage approval process, pre-approval can help homebuyers figure out how much they can really afford. It gives them an idea of how much a lender may be willing to let them borrow based on their current income, assets and debt.
How do you get a pre-approval?
I spoke with Ed Mermelstein, a real estate attorney and financial advisor and partner at One & Only Realty Holdings in New York City. He explained that the pre-approval process often focuses on checking a homebuyer’s credit history, income, debt and assets to help determine the loan amount.
“The process is essentially the same for all homebuyers. You will fill out a credit application, have your credit checked and verify your financial and employment history. The only thing missing will be the appraisal, which takes place after you identify the property,” says Mermelstein.
It is important to keep in mind that pre-approval is not the same as the final mortgage approval process you will go through once your offer on a house is accepted. Having pre-approval does not guarantee that you will get this loan from a lender. In addition, most pre-approvals have an expiration date of 30 to 60 days.
What are the differences between pre-approval and pre-qualification?
Finally, one area of confusion for homebuyers is the difference between the terms pre-approval and pre-qualification. The terms are occasionally used interchangeably, but they do not mean the same thing. The main difference is that a pre-qualification usually does not involve checking your credit history and verifying your income, debt or assets. You simply supply this information. On the other hand, pre-approval means that a lender has pulled up your credit history, and you have submitted documentation that verifies your income and assets.
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