If you plan to buy a home soon, you might have heard about mortgage preapprovals. But what is a mortgage preapproval, and why is it the smart move before you begin your search?
What does it mean to be preapproved for a mortgage?
A mortgage preapproval from your lender shows you exactly how much you can borrow and spend on a home. It will also outline the interest rate you will pay, though this might be different when you close on the home.
To decide how much they can lend to you, your lender will look at your income, debt and credit score. If your finances are in good health, you will be preapproved for a larger loan.
Improving your credit score is essential as it will lead to lenders offering better mortgage terms.
Why preapproval is important
When you are preapproved for a mortgage, your lender will give you a letter detailing how much they will lend. They will also provide the best home loan for your needs. This is beneficial in a few ways:
- It shows how much you can spend. Before you begin looking for a home, having a clear understanding of how much you can afford is vital. If you don’t know how much you can afford to spend on a home, you will waste time looking at properties that are out of your range. You will have a list of must-haves, like the location and number of bedrooms, but the cost could be more important than these requirements.
- It makes your offer more attractive. In a seller’s market, when there are fewer homes and more buyers, there is more competition when buying. Anything a buyer can do to make their offer look more attractive will improve their chances of buying the home. If the seller can see that you can borrow the money needed to fund the purchase, it could put your offer ahead of others.
- It helps negotiations. Since the seller can see you are qualified to purchase their home for the amount offered, they are more likely to be open to negotiations and concessions. This might mean you get more repairs and improvements included, or the seller might cover some of your closing costs.
- It provides a faster closing. The mortgage approval process is one of the significant things that can delay closing. If you have already gone through the preapproval process, there will be fewer things to do to approve the mortgage, and the closing process can happen faster.
How to get your mortgage preapproval?
The first important step to getting preapproval is choosing your lender. You can get preapproval from a few different lenders to compare their terms and interest rates.
When you apply for preapproval, the lender will need information from you. This will include:
- Identification. The lender will want proof of your identification and your social security number. They will use these details to check your financial history with a credit check. This will show the lender your debt-to-income ratio and how likely you are to repay the loan.
- Income. They will want proof of income for the last two years. This will require pay stubs, W-2s, tax information, and any other proof of income you have available.
- Assets. Details of investments and any financial gifts need to be provided. If you receive a gift to help with the down payment, a letter might be required to show where that money came from.
To ensure the preapproval process goes as smoothly as possible, you must be ready to provide these documents. When the lender has these documents, the underwriter can assess the amount you can borrow.
Preapproval is only valid for a limited time. This might be 60 – 90 days and should give you enough time to find and make an offer on a home.
Your pre-approval should remain valid if you don’t make any significant changes to your financial situation, like taking out a new loan.
If your financial situation does change in that period, you might need to begin a new preapproval. And this might mean you aren’t able to borrow as much as you expected.
Even if you are approved for more money than expected, you don’t have to spend all that on a home. If you spend less than the maximum available amount, your mortgage payments will be more manageable, and you will have fewer things to worry about should your finances take a hit in the future.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 35 years.
