What Is Pre Approved Loan – When you’re looking for a home, getting pre-approved for a mortgage can be an important step. A consultation with a lender and getting a pre-approval letter gives you an opportunity to discuss loan options and budget with the lender; This step can determine your total house-hunting budget and the monthly mortgage payments you can afford.
As a borrower, it’s important to know what mortgage pre-approval does (and doesn’t) and how to increase your chances of getting it.
What Is Pre Approved Loan
Think of a mortgage pre-approval as a physical exam for your finances. It is possible for lenders in all corners of your financial life to make sure you can pay your mortgage.
How To Get A Pre Approved Bank Housing Loan?
You’ve probably heard the term “pre-qualification” used interchangeably with pre-approval, but they’re not the same. With pre-qualification, you provide the mortgage lender with an overview of your finances, income and credit. The mortgage lender gives you an estimated loan amount.
Thus, a mortgage pre-qualification can be useful as an estimate of how much you can afford on a home. However, lenders do not pull your credit reports or verify your financial information. Accordingly, pre-qualification is a useful starting point for determining what you can afford but has no weight when you make an offer.
Pre-approval, on the other hand, involves filling out a mortgage application and providing your Social Security number so the lender can perform a strict credit check. A rigorous credit check is triggered when you apply for a mortgage. For this process, the lender pulls your credit report and credit score to assess your creditworthiness before deciding to lend you money. These checks are recorded on your credit report and can affect your credit score.
In contrast, a soft credit check occurs when you pull your credit yourself, or when a credit card company or lender pre-approves you for an offer without asking. Soft credit checks do not affect your credit score.
Pre Qualified Vs. Pre Approved: What’s The Difference?
Also, you will list all your bank account information, assets, loans, income, employment history, previous address and other important details to prove to the lender. This is because, above all, the lender wants to make sure that you can repay your loan. Lenders also use the information provided to calculate your DTI ratio and LTV ratio, which are important factors in determining the interest rate and ideal loan type.
All of this makes pre-approval more valuable than pre-qualification. It means that the lender has checked your credit and verified the documents to approve the certain loan amount. Final loan approval happens when you have an appraisal and the loan is applied to the property.
Mortgage pre-approval letters are generally valid for 60 to 90 days. Lenders put an expiration date on these letters because your financial and credit profile may change. When pre-approval expires, you will need to fill out a new mortgage application and submit updated paperwork to receive another application.
If you’re just starting to think about buying a home and suspect you might have some trouble getting a mortgage, going through the pre-approval process can help you identify credit problems — and possibly give you time to fix them.
Basics Of Pre Approved Home Loans
Getting pre-approved six months to a year before a serious home search puts you in a strong position to improve your overall credit profile. You’ll also have more time to save money for a down payment and closing costs.
When you’re ready to make an offer, sellers often want to see a mortgage pre-approval and, in some cases, proof of funds to show you’re a serious buyer. In very hot housing markets, sellers benefit from strong buyer demand and a limited number of homes for sale; They will be less likely to consider offers without pre-approval letters.
Applying for a mortgage can be exciting, nerve-wracking and confusing. Some online lenders can pre-approve you within hours, while other lenders can take several days. The timeline depends on the lender and your financial complexity.
For starters, you’ll fill out a mortgage application. You will include your identifying information, as well as your Social Security number, so the lender can pull your credit. Although mortgage credit checks are considered hard inquiries into your credit reports — and can affect your credit score — if you’re shopping multiple lenders in a short time frame (typically 45 days for the new FICO scoring models), consider a joint credit check. A single inquiry.
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Here is a sample of a similar mortgage application. If you are applying with a spouse or other co-borrower whose income you need to qualify for a mortgage, both applicants need to list financial and employment information. There are eight main sections of a mortgage application.
The specific loan product you are applying for; loan amount; Terms, such as time to repay the loan (amortization); and interest rates.
Address; Legal description of property; year of manufacture; Whether the loan is for purchase, refinance or new construction; and desired type of residence: primary, secondary or investment.
Your identifying information, including full name, date of birth, social security number, years of schooling, marital status, number of dependents, and address history.
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Names and contact information of current and previous employers (if you have been in your current position for less than two years), dates of employment, job title, and monthly income.
List your basic monthly income as well as overtime, bonuses, commissions, net rental income (if applicable), dividends or interest, and other types of monthly income, such as child support or alimony.
Also, you’ll need an accounting of your monthly joint housing expenses, including rent or mortgage payments, homeowner’s and mortgage insurance, property taxes, and homeowner’s association dues.
List all bank and credit union checking and savings accounts with current balance amounts as well as life insurance, stock, bond, retirement savings and mutual fund accounts and corresponding values. You’ll need bank statements and investment account statements to prove you have cash reserves and funds for the down payment and closing costs.
How To Get Pre Approved For A Mortgage
You need to list all liabilities, including revolving charge accounts, alimony, child support, car loans, student loans, and any other outstanding debts.
An overview of key transaction details, including purchase price, loan amount, improvement/repair costs, estimated closing costs, buyer-payment discounts and mortgage insurance (if applicable). (The lender will fill in most of the information.)
A list of any judgments, liens, past bankruptcies or foreclosures, pending lawsuits, or delinquent debts. You will also be asked to state that you are a US citizen or permanent resident and that you intend to use the home as your primary residence.
Most home sellers will be willing to negotiate with someone who has proof that they can get financing.
The Importance Of The Pre Approval Letter In A Chicago Real Estate Closing
Lenders are required by law to provide you with a three-page document called a loan estimate within three business days of receiving your completed mortgage application. This document includes whether the mortgage is pre-approved and the loan amount, terms and type of mortgage, interest rate, estimated interest and payments, estimated closing costs (including any lender fees), property tax and homeowner’s insurance estimates, and any loan amounts. Special features (such as balloon payments or early prepayment penalties). It also specifies a maximum loan amount based on your financial picture to help narrow down your home-buying budget.
If you are pre-approved for a mortgage, your loan file will eventually be transferred to a loan underwriter who will verify your documents against your mortgage application. The underwriter will also ensure that you meet the borrower guidelines for the specific loan program you are applying for.
After submitting your mortgage application, you will need to gather several documents to verify your information. Your preparation and organization will help the process go more smoothly. Here is a list of documents you need to submit to secure final loan approval before pre-approval or closing:
Many loan products allow borrowers to use a financial gift from a relative for a down payment. If you go this route, the lender will ask you to complete a standard gift deed in which you and the giftee state that the gift is not a third-party loan with an expectation of payment.
The Pre Qualification Process For A Home Loan
Otherwise, such arrangements may increase your DTI ratio and affect your final loan approval. Additionally, both you and the donor must provide bank statements for transferring cash from one account to another.
If you want to increase your chances of getting a mortgage pre-approval, you need to know the factors that lenders evaluate in your financial profile. They include:
Your DTI ratio measures all of your monthly debt compared to your monthly income. Lenders add up debts—such as auto loans, student loans, revolving charge accounts and other lines of credit—as well as new mortgage payments, and then divide the sum by your gross monthly income to get a percentage.
Depending on the type of loan, borrowers must maintain a DTI ratio of 43% (or below) of their gross monthly income to qualify for the mortgage. The higher your DTI ratio, the higher the risk
Pre Qualified Vs Pre Approved
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