What is the difference between pre-qualifying and pre-approval?
Pre-qualification is an informal way to see how much a potential homebuyer can borrow and is usually free. A lender estimates how much mortgage a buyer can afford by examining the potential homebuyers credit report, income, long-term debts, and any other information the potential homebuyer has on hand. This review can take a few hours or as long as a few days and gives the potential homebuyer a ballpark figure of the amount that they can spend on a home. Pre-qualification is not a guarantee of the loan amount you will actually qualify for once an in-depth analysis of your credit and ability to buy a home is completed. What you do have after this process is completed is a general idea of what price range you can afford on a home.
Pre-approval is a lender's actual commitment to lend to the potential homebuyer. The pre-approval process is more detailed and thorough than the pre-qualification process. The potential homebuyer will be asked to complete a mortgage application, and some lenders do charge an application fee for this process. The lender will verify all of the information provided on the mortgage application and review the buyers credit report. Pre-approval means that the lender has contacted the homebuyer's employer, bank and various other sources to verify all claims of earnings and assets. After everything has checked out, the borrower receives a letter stating that they have a mortgage pre-approved for a certain amount. By receiving pre-approval from a lender the homebuyer can speed up and improve their chances of reaching an agreement with a seller. Pre-approval is a lender's actual commitment to lend to a potential homebuyer
Why is pre-approval so important for buying a foreclosure?
When buying a foreclosure, the best type of lender to work with is one who understands the re-possession process. A knowledgeable lender can guide a homebuyer through any potential pitfalls that may crop up and ensure that the proper steps and procedures are being followed, such as ensuring that the property being purchased is FHA-compliant. Pre-qualifying for a loan is important for a potential homebuyer because it helps ensure that the buyer is in a financial position to purchase a property, and it places the buyer in the strongest possible position to negotiate with the seller of the property. When a potential homebuyer already has pre-approved financing in-hand, negotiations with both the seller and the lender go much smoother. Pre-approval gives the homebuyer a concrete idea of what they can afford and shows the seller that they are serious about buying a home.
Tips for the mortgage pre-approval process
Before applying for a pre-approved mortgage a potential homebuyer needs to make sure all their financial records are in order. This is a good time for the homebuyer to get a copy of their credit report and review it carefully for any errors. Having the following information readily available can help you ease your way through the pre-approval process:
- Pay stubs for the past 2-3 months
- W-2 forms for the past 2 years
- Information on long-term debts
- Recent bank statements
- Tax returns for the past two years
- Proof of any other income
Factors used to determine if you qualify
- A steady job history - Lenders will need to know your job history, and it will be a major factor in whether you qualify for a loan. You do not have to have held the same job for two years in order to be approved for the loan. Job moves that result in equal or more pay and continue to use proven skills are a plus. You just need to have a stable work history.
- Prompt Bill Payments - How you paid your bills in the past will give a lender an indication on how you will pay them in the future. When you apply for a mortgage or to seek pre-approval a lender will order a credit report to verify the information that you have provided and check on how well you have kept your promises to pay your debts. It is very important for you to disclose all of your debts and any difficulty you may have had in the past in repaying these debts. Try not to leave any information out. Credit reporting companies have access to a great deal of financial information about you.
- A solid Credit History - You may be able to use a "non-traditional" credit history. A lender may be able to document a credit history by using documents that prove you pay your rent, telephone bills, and utility bills on time each month. Make sure to put this information together yourself. Make copies of your canceled rent checks and copies of your utility bills.
Determine how much you can afford for a down payment
At this time a potential homebuyer should sit down and figure out how much of a down payment they can afford to put down on a home. There are mortgage options that are available that only require a down payment of 5% or less of the purchase price. But the larger the down payment is the less you will have to borrow, and as a result you will have more equity in your home. Generally, mortgages with less than a 20% down payment will require a mortgage insurance policy to secure the loan. When you are trying to determine the size of your down payment take into consideration that you will also need money for closing costs, moving expenses, and possibly even money for repairs and decorating. The lender will want proof that you have the funds that will be used for the down payment and part or all of the costs. If the money is in a savings account the lender will verify that the amount exists in your account and will ask your bank how long the money has been in your account. The lender wants to make sure that you are not borrowing the money that will be using for your down payment and closing costs. If you don't think that you can afford to a down payment, don't let this discourage you. There are many non-profit down payment assistance organizations that may be able to assist you with your down payment needs.
Mortgage lending institutions determine the amount you can receive by using two commonly accepted guidelines to help determine your ability to make mortgage payments.
- Your monthly housing costs. These costs include mortgage payments, property taxes, homeowner and mortgage insurance, and homeowner's fees and should total no more than 28% of your monthly gross income.
- Your monthly housing costs plus any other long-tem debts like car loans, and student loans should total no more than 36% of your monthly gross income.