When people are preparing to purchase homes, they may initially find the process to be bewildering. In a competitive housing market, it is important for prospective buyers to prepare so that their offers are likelier to be accepted. It is important for people to get preapproved for mortgages to increase the odds that their offers will be accepted for the homes that they want.
What is a mortgage preapproval?
Some people confuse a mortgage prequalification and a mortgage preapproval. In a prequalification, the buyer’s information is not verified by the lender. The lender simply asks the buyer to provide information about his or her income and credit but does not check to see if the information is accurate. The prequalification is simply a rough estimate of how much a buyer might be able to expect to borrow for a home based on his or her own reported income.
A mortgage preapproval, by contrast, involves a lender verifying a prospective buyer’s income, employment history and credit information. If the buyer is then preapproved, the lender will give him or her a preapproval letter. This letter states the maximum amount the borrower will be able to spend on a home. If the buyer then makes a purchase offer, the buyer can provide a copy of the letter to the realtor and seller in order to let them know that the borrower is serious. A preapproval does not mean that the buyer will definitely be approved for a mortgage on a specific home, however. A mortgage approval will depend on the buyer’s submitting specific documents to the lender as well as on the appraisal of the home. The home’s appraised value must equal or be greater than its purchase price.
Why getting preapproved for a mortgage is important
When people are selling homes, they do not want to waste their time on people who are not serious about purchasing. Realtors and sellers commonly ask to see preapproval letters from buyers. This lets them know that the buyers are serious and that they will likely be able to complete the transactions, which is considered to be much more preferable than going through the real estate transaction process only to later find out that the borrowers are denied for their mortgages, making the deal fall apart.
What you will need to get preapproved for a mortgage
In order to get preapproved for a mortgage, borrowers need to gather several important documents. They should start by getting copies of their credit reports from the three major credit reporting agencies, which include Experian, TransUnion and Equifax. The Federal Trade Commission reports that everyone is entitled to get one free copy of their credit reports from each of the three bureaus annually. They can do so by mailing requests or ordering them online at annualcreditreport.com.
After receiving the credit reports, people should then review them and ask the agencies to correct any information in them that is inaccurate. If everything is correct and the borrower’s credit score is good, he or she may then go ahead and apply for a preapproved mortgage. The prospective borrower will need to submit a signed authorization for the lender to get a copy of his or her credit report, bank statements, two years of tax returns and W-2s, and the most recent paystubs. After everything has been submitted, the lender will send it through an automated underwriting process. Normally, a preapproval letter may be generated in a few minutes. The letter should also detail what will need to be completed in order to secure full mortgage approval.
Getting preapproved for a mortgage puts people closer to their goals of home ownership. They may then start searching for the homes that are within their price ranges. It is important for them to keep in mind that preapprovals are normally only valid for 60 to 90 days in most cases. Once an offer is made, the preapproval letter may help the buyer to be selected by the seller over another prospective buyer who is not preapproved for a mortgage.