Knowing how much you can afford before looking for a home is ideal. You may have a golden number in your head but a lender will have the final say. If you secure a pre-approval from a lender ahead of time it makes the whole buying process much easier and avoids delays.
It is easy for buyers to confuse the terms pre-qualification and pre-approval. But they have two different meanings. Simply put, pre-qualification is an ESTIMATE of what you can afford. Whereas pre-approval is based on the proof you provide and is conditional loan approval.
Pre-qualification is a first step that some buyers will take to get a FEEL for a price range that they can afford. It is based on your income, assets, and estimated credit score. Lenders will give you an initial estimate of what you can afford.
BUT, a pre-qualification is not binding! It is simply a beginning point. When you get serious about buying, you need a pre-approval.
But why waste time with a pre-qualification?
Before you begin the home buying process, meet with a reputable loan professional and get a pre-approval letter. This shows that you are serious about buying and have completed that first step without delay. Sellers and/or Realtors® value a pre-approval because it shows them that you can secure the necessary financing to buy.
You meet with lenders in-person to create a pre-approval letter. You’ll provide the lender with all the following:
- Permission to order your credit report
- Paystubs, W-2s and/or tax returns to prove your income
- Asset statements, investment statements or any other proof of assets
- Proof of employment
- Any other miscellaneous documentation required by the lender
Once received, lenders will evaluate the documents and determine your conditional approval. This letter will state the mortgage loan amount you qualify for, the terms of the loan, and any conditions that may affect the approval.
It is normal for final approval to be contingent on a fully executed sales contract of the property to be purchased, a good appraisal and a proven clear title on the property.
The lender will complete the underwriting of your loan once a purchase contract is signed. They will confirm the property meets their requirements. Then the lender will re-confirm your income, assets, employment, and credit information before closing on the loan. It is important not to make any big purchases when going through the home buying process that may negatively affect your credit score.
Getting a pre-approval letter prior to beginning the home buying process will give you the confidence to make an offer and can help your negotiations with the seller. Your REALTOR® can provide you more information in a Buyers Guide and recommendations of trusted lenders.
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