Buying an affordable home is virtually impossible in certain housing markets across the country. Thus, many homebuyers unknowingly make offers on homes they cannot afford. Before beginning the bidding war on a potential property, it helps to have an indication of an affordable monthly mortgage payment. To receive this information, a mortgage pre-approval is necessary. Some homebuyers do not fully understand pre-approvals, and often confuse a pre-approval with a pre-qualification. However, the two processes are very different. Even if a homebuyer is pre-qualified for a mortgage loan, this does not guarantee a home loan.
What is a Mortgage Pre-Qualification?
When a homebuyer is pre-qualified for a mortgage loan, the lender will request information about current debts, income, and so forth. On the flip side, the mortgage lender will not verify the information. Thus, the potential borrower is not required to submit documentation such as tax returns, paycheck stubs, or bank statements. Based solely on stated information within the pre-qualification application, the mortgage lender will determine whether the borrower meet the requirements for a loan approval. Even so, loan approval is not definite.
What is a Mortgage Pre-Approval?
On the other hand, if a borrower obtains a pre-approval from a mortgage lender, the loan is guaranteed. Before a pre-approval is established, the lender will ask for all applicable documentations, and confirm information listed on the loan application. Borrowers must submit most recent banking statements, paycheck stubs for past three months, two year’s tax returns (self-employed), assets, and debts. Furthermore, mortgage lenders will review borrower’s credit history before a pre-approval is given.
Mortgage pre-approvals have many benefits. Importantly, the mortgage lender will determine an affordable loan amount based on the borrower’s current income and debts. Thus, the borrower avoids making offers on expensive homes priced too high for their budget. Time and again, homebuyers bid on a property, but are unable to secure financing.
Additionally, a pre-approval letter from a mortgage lender indicates a serious buyer. FSBO sellers prefer buyers with pre-approval letters. Some sellers refuse to open or show their homes to buyers without pre-approvals. Lastly, a pre-approval letter may result in your bid receiving high priority. For example, let’s say a seller receives two comparable offers on their property. If one buyer is pre-approved for a home loan, and other buyer is not, sellers are more inclined to accept the pre-approved buyer’s offer.
Tips for Increasing Mortgage Loan Approval Odds:
• Pay bills on time
• Reduce debts
• Limit credit inquiries
• Maintain steady employment
• Build a cash reserve