Pre-approval is one of the best ways to secure the loan you need for your new home or business. When you go through a mortgage lender, many times they will say that you are preapproved on a “prequalification letter”. What is a prequalification letter for a mortgage? And what is the approval in real estate terms?
A pre-approval is where a mortgage lender gives you the okay to proceed in acquiring a mortgage. In the simplest terms, the approval is pre-qualification. In lending, pre-approval is simply the pre-qualified acceptance of a specific loan or mortgage value range by a specific financial institution. This could be done in person, over the phone, or online. It is a necessary first step before signing on the dotted line.
There are several reasons why someone would be asked to submit a pre-approval letter. Most often, this is done during the pre-approval process. A person’s credit score pre approval or income level may be considered in the approval process. If so, the person submitting their letter will need to include documentation proving their income and their overall worth. Lenders look at a number of factors when evaluating credit scores, including total debt and repayment history.
Another reason for requesting a pre-approval is if you are looking to purchase real estate within a specific area. Many sellers ask for it as a means of making sure they do not default on the loan. If you have good credit, a seller may consider approving you on the spot. As mentioned above, there are a number of lenders that will do this for free. Usually if you have a low credit score, you will have to pay an origination fee to get this free pre-approval letter.
Now, let’s discuss how a pre-approval can benefit you as a buyer. First, if you are going to purchase any real estate, pre-approval is always a good idea. Lenders like it when their customers are serious about purchasing the property. It shows they are prepared and organized enough to make an offer on a property. This shows you are serious and that you have adequate funds to purchase the property.
Second, if you don’t have good credit, pre-approval can put you in a better position for a mortgage. Some lenders do not approve unless the buyer has perfect credit. While many people will purchase a property without any form of pre-approval, credit is something that needs to be checked. Having a pre-approval letter in place can give you a leg up in getting your mortgage.
Third, the approval does not have to be expensive. Depending on your circumstances, you may be able to get the approval for less than you would pay with other lenders. The lender only has to see that you have a reasonable budget and are committed to paying back the loan. They do not want to see any forms of financial hardship such as a bankruptcy, loss of income, etc. If you are in a bad credit situation, it may be best to work on improving your credit before getting pre-approval.
When searching for a home, make sure you ask questions and make sure there is nothing on your credit report that negatively affects your chances of getting the approval. Be realistic and have an honest answer to the mortgage questions you are being asked. Do not lie about your income or any financial information, because if discovered, this could cause problems in the future. Pre-approval mortgage loans are a great way to make a great down payment and a great interest rate on a new home!