Before you can even start looking at homes, you need to know how much money you have to spend. Obtaining a pre-approval letter — a verification from a mortgage company that they're willing to give you a loan — is both a great way to set your budget and to show sellers that you're serious about making an offer.
Read on for an overview of the pre-approval process. We'll walk you through what this document is, why it's so important, and how to get started on applying for one of your own. Trust us when we say that every buyer needs one.
When to Apply for a Pre-Approval
You should think about getting a pre-approval as your first step toward becoming a homeowner. It's best to apply as soon as you're ready to seriously enter the market, even before you start looking at homes.
This timing works best for a few reasons. First, a pre-approval will show you the maximum amount of money that a bank is willing to loan you. Obtaining one early on in the homebuying process will help you realistically define your budget. While you certainly don't have to buy up to that full loan amount, this will help save you from falling in love with a home that's truly beyond your means.
Additionally, getting pre-approved early on will help you be able to move quickly once you do find your dream home. These days, pre-approval letters are considered standard and should be included with every offer. Having one in hand before you start looking at properties means that you'll be ready to submit an offer at a moment's notice once you find your dream home. .
The Difference Between a Pre-Qualification and a Pre-Approval
You've probably heard of pre-qualifying for a loan, but in today's real estate market, pre-qualifying is often considered less than ideal. Because it gives you a figure based only on general estimates you provide of your income, debts, and assets, a pre-qualification letter is not a guarantee of financing — none of your financial information has actually been verified.
In the case of a pre-approval letter, a lender will take the time to independently verify your financial situation — through official statements and credit checks — before providing you with a maximum loan amount that the bank will be willing to lend you. For this reason, many sellers prefer them to pre-qualification letters. They show that you are definitely financeable.
What to Bring With You to the Bank for a Pre-Approval
Since pre-approvals are a true guarantee that the bank is willing to give you a loan, they require a little more legwork. Your potential mortgage lender will want to look into your finances — your incomes, debts, and assets — to see how much you qualify for. While this process may take a few days to complete, you can help speed up the process by bringing the appropriate documentation with you.
Here's what you need:
- 30 days of pay stubs (including your year-to-date income)
- Two years of W2's (or high-net tax returns, if you're self-employed)
- Quarterly statements for all of your assets: checking accounts, savings accounts, IRA's, 401k's, etc.
- Your social security number and driver's license or state ID
Your lender will also want to run a credit check, so you should also be prepared to give them permission.
How a Mortgage Pre-Approval Affects Your Credit
Many buyers worry about how applying for a mortgage will affect their credit, especially if they're working towards improving their score. Luckily, however, these fears are mostly unfounded. Since 2010, when The Dodd-Frank Law was passed, all real estate credit inquiries are considered soft inquiries, meaning that they won't negatively impact your score.
Shopping around for the right lender won't hurt your score either. The other stipulation of the Dodd-Frank Law is that all real-estate-related inquiries that are made within the same 30-day period will count as a single pull.