Understanding Loan Pre-Approval
When buying a new home one of the most important things you should do is get pre-approved for the loan. But, how does a loan pre-approval work? How long is the loan pre-approval good for? Does a pre-approval mean the loan is guaranteed?
Our exclusive buyer’s agents answer these and other pressing questions to help you better understand the loan pre-approval process.
What is the Difference Between Loan Pre-Qualification and Loan Pre-Approval?
A loan pre-qualification is a quick process that provides the home buyer with a ballpark idea of how much they could potentially be approved for. This gives the buyer a basic price range to search within. Mortgage pre-qualification can often be done over the phone. The interviewer simply asks a few standard questions pertaining to your income, assets, and other financial factors and then he or she provides you with your pre-qualification amount.
A loan pre-approval, on the other hand, is a more complex and time-consuming process that involves deeper involvement. The loan officer will do almost everything they would do as they were actually your loan, such as check your credit, review your financial and tax statements, etc. Some lenders may charge a fee for the pre-approval service.
What Documents are Needed for a Loan Pre-Approval?
Most lenders will require the following when pre-approving a mortgage:
- Your driver’s license
- A copy of your two most recent bank statements (checking account, savings account, money market, etc.)
- Your two most recent tax returns
- IRA or retirement account statements and their current balances
- Any stocks or mutual funds you own outside of retirement accounts
- Your most recent month’s paystub(s) from your job
- The application fee (if required by the lender)
How is the Loan Amount Determined?
Every lender uses their own unique process for determining pre-approved loan amounts, but for most, the applicant’s debt-to-income ratio plays the largest role in how much they can be approved for. In most cases, if your debt-to-income ratio is 35% or lower, and your credit rating is decent (No less than 620), you can get pre-approved for a loan, the amount of which is determined by the state of your financial health (income, savings, down payment amount, etc.).
Is a Pre-Approved Loan Guaranteed?
Just because you are pre-approved for a mortgage does not automatically mean the lender will officially approve your loan, but it is a good place to start. Essentially, a pre-approved loan amount is a good faith estimate made at the time of application. If anything changes between the pre-approval and the actual purchasing, such as a decrease in income, an increase in debt, or even a simple new credit inquiry, then the lender can rescind their offer. In addition, a lender can also rescind on their pre-approval should the home appraisal prove that the price of the home is higher than its current market value.
Is There a Benefit to Getting Pre-Approved for a Loan?
Absolutely! Getting pre-approved for a home loan gives the buyer more purchasing and negotiating power because it shows that the bank is willing to grant the loan. This means the buyer can be more selective when shopping for a home. Plus, most lenders will work with the borrower to help ensure that they understand what is required in order to keep the loan pre-approval valid up to the point of closing because they don’t want to lose the business.
Call Just For Buyers Realty Today for More Information About Loan Pre-Approvals
If you’re looking to purchase a new home, then choosing an exclusive buyer’s agent as your real estate representative can be a true benefit. A Just For Buyers Realty exclusive buyer’s agent can help you navigate the complexities of buying a home in today’s real estate market and best of all – our services are usually free to the buyer. Call us today at 910-202-4813. One of our agents will gladly help you every step of the way.