Buying a home is a process with many steps. Practically anyone who has started that journey eventually contacted a Real Estate agent, and the question has come up: Have you been pre-approved?
The homebuyer may have been pre-qualified by a lender and may think that it is the same thing. Unfortunately, pre-qualification and pre-approval are quite different. Here is what you need to know about both processes and why Real Estate agents usually insist on pre-approval vs. pre-qualification.
What Is a Mortgage Pre-Qualification?
Mortgage shoppers want to know early on how much home they may qualify for. After all, they will need to know payments and rates so they know what to expect when they make the purchase.
During those early conversations, while shopping for a home loan, they will talk to different lenders to get an idea of what is available and possible.
The initial stage of the process is a pre-qualification which is typically based on verbal information over the phone. It is a very informal process that does not include the full review of the documents needed for a formal pre-approval.
Lenders will do a quick assessment of how much the buyer may qualify for by asking them about their income, their debts, and how much money they have for a down payment. While this is a good first step, nothing is really verified at this point, and the pre-qualification is done informally.
The problem is that the data that was verbally collected may not be sufficient for a pre-approval. That’s when things can go wrong, and the reason Real Estate agents insist on having a pre-approval before committing to signing a contract on a home.
What Is a Mortgage Pre-Approval?
When a buyer submits the documentation needed to qualify for a loan, and the lenders review the documents and submit the loan to underwriting, that is a pre-approval.
Some of the formal processes that take place during pre-approval are the following:
- Paystubs have been collected
- Tax returns have been collected
- Credit has been checked
- Bank statements for the down payment have been collected
- You receive a loan estimate with details of your closing costs and payments
Once these documents are collected and reviewed by an underwriter, the borrower receives a “Conditional Approval.” The final approval is subject to a review of the property information, such as appraisals, inspections, etc.
A formal pre-approval lets those involved in the purchase process know that the buyer qualifies for a loan up to a pre-determined amount based on verified information.
In today’s market, it is particularly important to be pre-approved because you are competing with many other offers, many of which are cash offers. As you can imagine, agents don’t want to tie up a home with someone who may not be able to get the final approval once they submit their documents to the lender. They want to know upfront if you are qualified.
When Should I Get Pre-Approved?
The right time to get pre-approved is when you are ready to buy a house. If you are just starting out and you are still not committed, you may be OK with just a pre-approval which will give you the info you need to decide if you want to move forward with a home purchase.
Keep in mind that a pre-approval does have an expiration date, usually 90 days out. This is because lenders require that all information used for formal underwriting needs to be recent and not more than 90 days old for most documents. If you are looking to buy in six months to a year, talk to your lender and have them give you guidance on what you should do.
How Long Does Pre-Approval Take?
Getting pre-approved will depend on how long you take to give the lender what they need to review your application. Once the lender has a complete file, they can usually give you a decision in a few days.
Are Online Automated Pre-Approvals Legitimate?
Technology has advanced, as has the process of pre-approving a loan online. There are cases in which you can submit all your documentation yourself and actually receive a pre-approval.
The potential problem here is that at some point, a human being will have to review your documents. At that point, there may be additional questions that were not addressed by an automated process.
If you have made commitments to a seller based on an automated pre-approval, you may have some difficulties with your purchase if you are denied a loan later once a human being has reviewed your documents. This is why it is advisable to have an actual person review your information.
What Is the Cost to Get Pre-Approved for a Mortgage?
Getting pre-approved does not usually cost the applicant any money upfront. The lender will run a credit check which does incur a cost to the lender. If you decide to pursue the loan at closing, you will be charged for the credit report and other usual and customary loan fees.
Will Getting Pre-Approved Hurt My Credit?
This is a question that comes up often when looking into getting pre-approved for a mortgage. The lender will check your credit which does generate a hard inquiry on your credit. One inquiry on its own is usually not a problem.
You may notice a drop in your FICO score if you shop with different lenders at different times over a period of more than 30 days. Also, if you have your credit checked for other purchases at the same time, such as car loans or credit cards, that will have an impact on your credit.
Recommendation for Home Buyers — Get Pre-Approved
If you are committed to buying a home, you will be much better served by having a formal review of your loan application and a pre-approval of your loan application.
It will be well worth it for you to have the peace of mind that you know for sure you will qualify for the purchase. It will also make it considerably easier to deal with Real Estate agents when you want to make offers; they will typically insist on a pre-approval or refuse to present your offer to the seller.