Buying a home will expose you to various financial terms you won’t usually hear in everyday conversation. It can make you confused about how the process works. You’ll learn that the first step to buying isn’t to search for a home.
Well, you may look for a home before anything else. But when you are ready to buy, you can’t just call the seller, settle your payment, and get the keys to your new home. Instead, you’ll complete a series of processes that involves multiple parties.
You’d encounter three mortgage terms if you borrow money: pre-qualification, pre-approval, and approval. You may hear those three words spoken in the same sentence sometimes. But it doesn’t mean they’re synonymous with each other.
Mortgage pre-qualification is sometimes confused with pre-approval. But the two are entirely separate processes. When you get pre-qualified for a mortgage, a lender gives you an estimate of how much they may let you borrow. You will provide them with your financial information, such as your proof of income and credit score.
The pre-qualification process may also show you the type of mortgage you can get based on your financial information. You’ll get an idea of the loan amount you can afford as a result. However, the pre-qualification process doesn’t verify your financial information. Hence, the lender cannot see your red flags when considering the amount of money to lend you.
You don’t need to pre-qualify for a mortgage before seeking a pre-approval. But it will help you prepare for the subsequent processes. In addition, it can confirm whether you are ready to buy a home or not.
How to Get Pre-qualified
Go to any bank or credit union to get pre-qualified. Bring your financial records, such as a bank statement, proof of employment and income, and tax returns. Present a valid ID and, more importantly, come with your credit score.
Visit more than one lender so that you can compare the deals you may qualify for. But beware that you won’t likely get precise results because the process isn’t as thorough as a pre-approval.
Mortgage pre-approval is a legal process that assesses your credit and approves you for a particular mortgage before you start looking for a home. Consider it the official first step to the home-buying process.
Getting pre-approved for a mortgage gives you a more precise calculation of your potential monthly payments. The monthly payments depend on the home’s price, loan term, interest rate, property taxes, and insurance.
The mortgage a lender will pre-approve depends on your income and credit. As a result, you will get an idea of the kind of home you can afford. For example, if you want to buy a three-bedroom house in London but you only got pre-approved for the price of a two-bedroom flat, then you can decide whether to save more money for your dream home or settle for what you can afford today.
How to Get Pre-approved
Mortgage pre-approval is a longer process than pre-qualification. It requires at least five documents:
- Proof of income
- Proof of assets
- Good credit
- Employment verification
- Other documentation (e.g., valid ID, Social Security)
You would see your results in a few days to a week. The process would assess your credit and income thoroughly. When it’s done, you’ll receive the lender’s pre-approval letter. This letter boosts your creditworthiness, helping increase your chances of succeeding in the final approval.
Final Mortgage Approval
With your pre-approval letter in hand, you’re now ready to shop for a house and borrow money. You can use real estate apps or websites to help you find the perfect home. When you’ve narrowed down your options, consider enlisting an experienced mortgage broker’s help before undergoing the final pre-approval process.
A mortgage broker acts as the middleman between you and lenders. They help you find a lender who can offer your pre-approved mortgage deal. You may approach the same lender where you got your pre-approval from. With your broker’s support, you can enhance your credibility and persuade the lender to hand you over the loan. If you’re lucky, you may also get a better interest rate.
Hacks to Getting Approved
The requirements for the final approval are the same as those for a pre-approval. But in this scenario, you have already chosen a house to buy. The lender will look at the house’s purchase price and determine if you can afford it. If they give the go signal, they’ll ask for a down payment, and you may start signing the mortgage contract.
Prepare for all these processes by organizing your financial documents and improving your credit. Your credit is the most important of all. If you’ve got a near-perfect credit score, you won’t have an issue getting any loan you need.