Buying your dream home is a complex process that begins with earning a letter of pre-approval from a mortgage lender. What is a pre-approval letter, and why is it important? This informative post uncovers everything you need to know about this crucial part of the home-buying process.
Champions Mortgage is the leading mortgage broker in Houston. Count on our team of specialists to guide you through pre-approval and help you secure a home loan.
What Is a Pre-Approval Letter?
If you want to buy a home, the first step involves working with a lender and obtaining a pre-approval letter. This document is a crucial part of the house hunting and buying process because it informs sellers that you are a trustworthy buyer who can secure enough financing for a loan. A pre-approval letter essentially serves as a safety net for sellers and instills their confidence in you as a prospective buyer.
When Should You Secure a Mortgage Pre-Qualification or Pre-Approval Letter?
Many people mistake mortgage pre-qualification and pre-approval letters. Both are important to obtain before buying a home but provide different information. Discover the main differences between the two below.
What Is Loan Pre-Qualification?
Pre-qualification tends to carry much less weight than a pre-approval letter. Lenders will often check your credit through a soft inquiry that has no impact on your credit score. They will also review your financial information, including:
- Your annual income
- Current housing payment
- Monthly debt obligations, such as student loans or car payments
- Savings account balance
Lenders use this information to provide an informal range of how much you can afford to buy. For example, someone with no debt and an annual income of $100,000 may receive pre-qualification to borrow more than someone with $100,000 in debt and an income of only $40,000. This process gives you an idea of how much you may be able to secure for a home loan, but it is not set in stone until lenders analyze your finances and officially give you loan approval.
What Is a Pre-Approval Letter?
Gaining a pre-approval letter for a mortgage involves taking a closer look at your finances and credit history. Lenders will initiate a hard inquiry on your credit report that may impact your credit score in the short term. The process will take longer than pre-qualification.
Having a letter of pre-approval doesn’t always mean that a lender will approve your loan application. However, it provides an excellent way to show sellers that you’re a serious and worthy buyer. Some sellers won’t accept offers from those without a pre-approval letter because they don’t want to risk the sale not going through due to insecure financing.
It’s wise to have one or both of these documents handy by the time you start viewing properties and making offers. Mortgage pre-approval letters come with an expiration date between 30 and 90 days after you receive them. If you decide not to buy a home within that time, the document will no longer be valid, and you will have to pay for another mortgage pre-approval application.
Mortgage Applications vs. Pre-Approval Letters
When you find it’s the right time to buy a house, and you have to secure a home loan, you’ll need to complete a mortgage application. Getting a pre-approval letter early on in your search will get you familiar with this process. Both documents will let you know how much you can borrow for a loan and the interest rate of that loan.
The primary difference between the two documents is that a pre-approval letter applies to any home you wish to make an offer on. You’ll submit a mortgage application for a specific property, which may get approved if the seller accepts your offer. Both of these documents require the following information:
- Proof of identity: You need to supply a lender with a copy of a driver’s license, passport, or other government-issued ID. Your social security number is also necessary for proof of identity.
- Credit report: Lenders need authorization to access your credit history to assess your score and whether to deem you a reliable borrower.
- Income and employment verification: To evaluate your income, lenders require you to provide bank statements, pay stubs, and tax returns for the past two years.
- Down payment information: Certain loans have down payment requirements, typically a set percentage of the price of the home. You will need to confirm you have access to funds to cover the down payment for the home.
- Debts and assets: If you have debts or other investments to your name, a lender will need to calculate each of them.
How Long Does Pre-Approval Take?
Aside from “What is a pre-approval letter,” one of the most common questions prospective home buyers have for lenders is “How long does it take to get pre-approved?” Typically, the process is simple, and you can receive a pre-approval letter the same day you visit with a broker. The process may take a few extra days if you fail to provide the necessary documents or if your credit history contains prior debts or foreclosures.
Make sure you don’t hide anything from your lender and try to maintain a good credit score and finances, as this will make securing a loan much easier. The pre-approval process might be short, so make sure you apply when you plan to start making offers. Confirm with the lender how long the pre-approval letter is valid and adjust your buying timeline accordingly so that you don’t have to repeat the process if you pass the expiration date.
Contact Houston’s Top Mortgage Broker
Although you now know the answer to “What is a pre-approval letter?” you probably have other questions about the topic. Turn to the experts at Champions Mortgage with all your questions and concerns about this important process. We’ll let you know how long mortgage pre-approvals last, how to secure pre-approval, and much more.
Reach out to our team today to begin your home-buying process. Call (281) 727-2500 or email info@championsmortgageteam.com to speak with a specialist.
