Importance of Home Loan Pre-Approval Before You Shop for Houses
Before you even begin to shop for a new house, talk to a home loan company about pre-approval. Home loan pre-approval is a process in which a bank or financial institution looks at your debt, income, and assets and determines if you are in good standing for a home loan and, if you are, how much of a mortgage you can afford given your income and current debts. Make sure the bank or financial institution understands you want a pre-approval letter and not pre-qualification. There is a difference, as pre-approval is a commitment the bank makes to lend you the money once you find a house that meets the suggested price range. Prequalification is not a guarantee.
Benefits to Pre-Approval
Getting pre-approved for a mortgage is an important step in buying a home. First, it gives you a good idea of the highest home price you can afford, while staying within the government's preferred range of a debt-to-income ratio of 43 percent.
Many home buyers will no longer consider accepting an offer if you are not pre-approved for a mortgage. If you opt to skip this step, you set yourself up to lose out on a house you love. Even if a seller does accept your offer, you then take a risk of having the bank deny your mortgage application, leaving both you and the seller disappointed.
What Documentation is Needed for Pre-Approval
Your lender will ask for recent pay stubs, tax returns if you are self-employed, current bank statements, and account numbers on loans and installment debt that you are currently making payments on. You must also give your SSN to the lender and permission for the company to run a credit check on you.
It can take up to 14 days to get a pre-approval letter, so plan accordingly. That letter is then valid for two or three months. Pay attention to the expiration date on that pre-approval letter. If you find a house and time has run out, you could be denied the home loan.
