A pre-approval letter is pretty much your golden ticket to homeownership. Therefore, if you are currently without a pre-approval letter, you should not be actively shopping for homes as you have yet to take the first crucial step in the home purchasing process. If you are in the market for a home, however, then it is time to get serious about getting pre-approved. Of course, you are probably wondering how exactly you should go about doing that? Well, for starters, gather your necessary documentation—income and employment details, employer contact information, bank accounts/ retirement accounts, any/all assets, a list of property in your name or that you have ownership in, as well as an account of your debts, and other liabilities. This documentation will allow the lender(s) of your choosing to make a hard credit inquiry. Ultimately, a hard credit inquiry is vital in determining your pre-approval status, which can make or break your chances of owning a home.
Once the pre-approval process is underway, you will quickly see why it is essential to have a pre-approval letter. For instance, getting pre-approved demonstrates to a seller that you are serious about purchasing a home. Being pre-approved also puts you ahead of the curve, making you appear more competitive to sellers, which can be extremely helpful if a bidding war breaks out with other potential buyers. Furthermore, a pre-approval letter gives you a better understanding of your immediate financial situation. A better understanding of your financial situation means you have a better idea of how much you should borrow, what your possible down payment will be, and which loan programs you should consider. What’s more, pre-approval helps to narrow down your potential home prospects to affordable houses within your budget. Additionally, if any issues arise during the pre-approval process, you can address them beforehand.
Likewise, you should make sure you are aware of the difference between a pre-approval letter and a pre-qualification letter. To simply put it, the Federal Reserve defines a mortgage pre-approval as a lender’s written commitment that they have fully assessed a potential buyer’s overall creditworthiness. Pre-approval status is also conditional upon such things as a suitable property, sustained creditworthiness, and additional terms required by the lender. Whereas, a mortgage pre-qualification is less formal and states that you could qualify for a lender’s current loan program for a pre-determined amount. A pre-qualification letter also holds very little weight with sellers or real estate agents. Consequently, it is in your best interest to secure a pre-approval letter as it is a more acceptable, comprehensive, and in-depth assessment that puts you in the best position to become a homeowner.
Once you receive your pre-approval letter, it is important that you remember its only valid for 30 to 90 days. As a result, you should wait to get pre-approved if you are not seriously looking for a home at this time. In addition to being temporary, your pre-approval status is also conditional, as briefly mentioned above. Therefore, it is vital that you don’t do anything that would revoke your pre-approval status. For example, obtaining new debt, loss or change of employment, or any drastic changes to your income can cause you to lose your financing. Similarly, a decrease in your credit score or a loss in assets can also affect your status. Obviously, life happens, and you cannot control every aspect of it; thus, if an issue or change arises, it is imperative that you speak with your lender to ensure that your status is not negatively impacted. Moreover, having multiple lenders in your corner is also beneficial when your financial situation changes.