A pre-approval from a mortgage lender helps you plan for your maximum house budget. It’s a soft inquiry on your credit, and isn’t tied to a specific house. The amount you get approved for is what the lender feels comfortable saying: (1) we will likely lend you that money, (2) we feel comfortable with your current financial status and owing us that as a new loan, (3) please go out and search with that pre-approval amount as a limit and let us know what you find.
The pre-approval amount is guaranteed, however, they also include an estimated interest rate. The interest rate is not stable and can change based on market trends (which we know fluctuate greatly these days week to week). In order to lock in, you have to have a specific house that you’re planning on buying and you lock in on that exact address and rate.
*A pre-approval is only good for 90 days. While you will likely find a house to lock in on before this time frame is up, it is possible you’ll need to get another pre-approval if you haven’t yet. Keep this deadline in mind as you search.*
What do you need for a pre-approval?
A pre-approval is a soft inquiry on your credit which means it shouldn’t impact your credit score. If you’re embarking on the pre-approval process preemptively to simply see if you qualify or what you could qualify for, it’s not going to negatively impact you. It can however, give you a better understanding of your financial situation and how lenders view that situation.
If you have a lender you’d like to use, either from your bank, or from a referral, you’ll set an appointment with them (or often this can all be done online). You’ll bring all necessary documents (detailed below), they’ll process it using their software that dictates the lending risk, and let you know what your pre-approval will be.
Items required for a pre-approval:
- Social security number
- Proof of identity
- Financial history–w2s, tax returns, etc.
What are they looking for?
The primary thing lenders are looking for is your debt-to-income ratio. This means the amount of debt you have per month, and the income you bring in during that same month. Before buying a house, it’s important to reduce all credit inquiries or increases so as to limit your debt and thereby bolster your DTI. This includes new cars, financing furniture or appliances, as well as regular credit card increases. You also want to have a stable or consistent employment history; switching jobs anytime recently can impact your reliability. Lenders want to run the credit check and be able to see dependability to pay back their loan.
Why is it so necessary?
There’s a couple of reasons that a pre-approval is the first step to buying a house. Here’s a few:
- You can perform all the financial analysis you want, and even have a plan for what you’re willing to spend on a house, but if a bank isn’t going to finance your plan, it’s pointless. A mortgage company giving you a pre-approval is assuring you that if you find a house within their provided limit, they will likely finance you. This way you can house hunt with some light financial assurances and be more prepared in that search.
- Oftentimes, Real Estate Agents will actually refuse to take you house hunting if you aren’t pre-approved yet. This is mostly due to efficiency for both parties. This saves the agent time because they can narrow down your budget and options accordingly. However, it’s also to your benefit, because it establishes a solid expectation. You likely know what you want in a house (as far as bed and bath counts, location, and age of house). Throw in a max budget item for what you’re truly capable of affording, and your options are a lot easier to sift through.
- Being pre-approved also makes it easier for you to put in an offer on a house. This has the dual purpose of making you appear more reliable and serious–something that sellers want. It will speed up the paperwork for putting in an offer, because it cuts out a step already, which means that you can move quickly–a vital quality in today’s market.
What if you don’t pre-qualify? Or you can’t pre-qualify for the amount you actually need to buy in your area?
This just means you need to do a more long-term review of your finances and start making different choices to achieve your goals. If you want to buy a house, and that’s your first priority, let’s figure out how to get there together. Stairs can help you find government programs that offer grants or specialized loans as well as help you with an investment plan to grow your income, and get you into that house that you want.