April 19, 2013
Buying a home can be one of the most rewarding experiences in life, yet it can also be one of the most stressful. Much thought and research on your part must go into the process, from selecting the right home in the right location, to obtaining financing. A great place to begin this exciting journey is to visit a lender to get pre-qualified or pre-approved. A common misconception for many people is that being pre-qualified for a loan is the same as being pre-approved.
A pre-qualification provides a maximum amount a bank will likely lend you based on either an online application, telephone, or in-person conversation about your current income and expenses. Many real estate agents encourage their potential buyers to get pre-qualified before showing them homes. This process requires you to provide information regarding your income, assets and liabilities. Getting pre-qualified may potentially save you time and disappointment when you begin searching since the information you provide will help determine how much of a home you can afford. Even if you are not ready yet to commit to purchasing a home, the pre-qualification process helps in making financial planning decisions for when the time is right. While pre-qualification is important, and often times extremely quick, keep in mind that the lender may not have verified all of the information, and a pre-qualification is not necessarily a loan commitment. For this reason, many people choose to get a pre-approval instead of a pre-qualification.
Getting pre-approved helps you make a stronger offer on a home, as the offer is not contingent upon obtaining financing. Pre-approval begins when you meet with a mortgage lender and complete a full loan application. The lender will then obtain a credit report from all three credit reporting bureaus, document and verify all acceptable income and assets, and have the file approved by the lender's underwriter. The lender will issue you a Pre-Approval Commitment Letter and will suggest loan programs that closely meet your needs. For example, first time homebuyers may qualify for mortgage programs with little or no money down, while a repeat home buyer who has more equity may qualify for a 15-year loan with lower interest rates.
It's important to be aware that not all pre-approvals are created equally. Don't be fooled by lenders that offer “quick” pre-approvals. Talk to your lender to ensure their commitment is ironclad. Seek out a lender that will underwrite the loan and fully review your credit, income, and assets. Upon making an offer, this letter lets the seller and real estate agent know that the offer is serious and that financing has been arranged. An ironclad pre-approval may be what gives you an edge to get the house you want.
After you have been pre-approved, the final stage of the mortgage process is the actual loan commitment. A lender will re-underwrite your loan after receiving information on both the house you want to purchase and your desired loan amount. Meeting the lender's guidelines is important. Price however is just one aspect of the home that a lender considers. There are several other items to be reviewed by the lender before the loan can close, such as an appraisal of the property, title search, updated credit report, and proof of homeowners insurance. The property's appraised value must come in at the same or higher than the agreed upon sales price. In certain areas, flood insurance may also be required.
As soon as you have successfully navigated your way through the phases of the mortgage process and all the criteria has been met, you will be well on your way to a closing date and signing all of the paperwork involved in the purchase of your home. Congratulations!