When you're ready to buy a home, one often overlooked step by newbie prospective homebuyers is the need for a mortgage loan pre-approval letter. In this blog entry, I'll go over the three types of mortgage pre-approvals so that you can research and decide which pre-approval type is best for you. I've ordered them below from the "just curious" buyer (#1) to the "ready-to-go" buyer (#3). It's worth noting that all pre-approval types have an expiration date, which will vary based on type and lender.
1. Pre-Qualification – Just Curious Buyer
When you're ready to start home shopping but don't yet have the urgency to buy, pre-qualification is a solid initial step to estimate how much you can borrow and what monthly payment is comfortable for your budget. Of the three mortgage pre-approval types listed here, this is the most informal type that requires surface-level documentation and provides you with a rough estimate of your creditworthiness and how much home you can afford based on the information you submit.
You input your credit, debt, income, and asset information to a lender to get started. A lender will take this information and generate a mortgage amount and monthly payment, usually within a couple of days. Most lenders only run a "soft inquiry" on your credit, so your credit score is unaffected. However, confirm this before submitting, as this can vary from lender to lender. Since your information isn't verified, the approval amount is not guaranteed, and it may change once you submit your documents for a pre-approval letter.
2. Pre-Approval – Getting Serious Buyer
At this phase, you know you want to buy a home, the finances are in order, and your down payment is nearly ready. You may even skip the pre-qualification stage altogether and go right into applying for pre-approval. Things are getting serious! While applying for pre-approval, this is the time to not apply for new credit and pause on making large purchases, as these actions may affect your credit score and debt-to-income ratio, which play a role in your mortgage qualification.
To get started, you'll research and shop for lenders or choose to work with a mortgage broker. To learn more about mortgage brokers and direct lenders, check out this helpful article on nerdwallet.com. Once you've decided, you will securely apply with your documents, including proof of income, employment history, proof of assets, credit history, and identification. Lenders will run an in-depth look at your credit report. You can expect to hear back from lenders with a pre-approval letter within 3-10 business days.
Note: An in-depth credit review for pre-approval will result in a "hard inquiry" on your credit report. A hard inquiry will drop your credit score, usually up to 5 points. The credit bureaus give loan applicants up to two weeks to submit multiple loan applications. They will turn those multiple hard inquiries from loan applications into one hard inquiry (instead of multiple) if done within a short timeframe. A hard inquiry can stay on your credit report for up to two years, but it typically doesn't affect your credit score after one year.
3. Fully Underwritten Pre-Approval – Ready-to-Go Buyer
This pre-approval type is for the home buyer who wants their offer taken seriously by sellers in a competitive market. If that's you, congratulations, I think you're about to buy a home! A fully underwritten letter is the most comprehensive mortgage pre-approval that you can have, and it can speed up the closing process. To get here, you go through the pre-approval process outlined above, and then you take it a step further: your chosen lender's underwriter conducts their due diligence with a manual review. Once the underwriter is satisfied with the information and the credit package, you will receive a fully underwritten pre-approval letter. This process typically takes 1-2 weeks to complete.
If you've gotten this far into my blog entry, THANK YOU and kudos for hanging in there! I hope you feel more knowledgeable about your options. Please reach out if you'd like recommendations for local lenders or mortgage brokers who can further help you decide which pre-approval type is best for you.
DISCLAIMER: This material is provided for informational purposes only, and is neither intended to provide, nor should be relied upon as financial or legal advice. As a real estate agent, I'm not qualified to give you financing advice. Please consult your lender and accountant to decide if/how/when to purchase a home.
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