A preapproval letter is a document from a lender stating that they have assessed your finances and are willing to lend to you up to a certain amount. Many sellers and real estate agents require these from homebuyers before accepting an offer on a property.
Most lenders offer a free pre-approval. However, some charge an application fee averaging from $300 to $400. These fees are often credited back toward your closing costs if you decide to move forward with that lender.
What are the benefits of getting preapproved?
Kickstarts the Process
For starters, this means you are one major step closer to homeownership! It takes the guesswork out of what you can afford and eases the transition of paperwork when closing the deal. It gives you a clear vision of what your budget will look like, and where you can start looking.
Getting preapproved is a great way to reserve a seat at the finish line, and generally makes the purchasing process a whole lot easier for everyone involved.
Demonstrates Your Creditworthiness
Part of the preapproval process requires pulling your credit and making sure you are consistent with your payments. This is more commonly known as prequalification. A lender does not want to loan you money if you have a history of risky spending behavior or making late payments.
Yes, pulling your credit report will affect your score, so it’s important that you have a good score going into the application procedure.
Ultimately, getting preapproved will improve the ability to close your loan quickly and get into the home of your dreams! Showing up with a letter demonstrates to sellers that you are a serious buyer and have done your homework.
Being preapproved doesn’t commit you to work with that lender, but if you do it will make it faster to close on a loan because they will already have your paperwork on file.
Having a letter when you submit an offer on a home is also a great negotiating tool. It means you’ll be able to close on a loan faster, which is very appealing to sellers. If a seller receives multiple offers (which is highly likely right now in an 80% buyer market), the one with the preapproval will generally be chosen.
What to do before getting preapproved?
- Check your credit score– know where you stand before reaching out to a lender
- Check your credit history– payment history is the biggest proponent between a good score and a bad score. Make sure you don’t have any defaults or errors that might flag a potential lender. If you do, it might be beneficial to hold off on house hunting until that is resolved.
- Calculate your debt-to-income ratio– the ideal debt-to-income ratio for aspiring homeowners is at or below 36%. Essentially, the lower your ratio, the better chance you have for scoring a low mortgage rate.
- Gather income, financial account, and personal information– this takes form in providing W-2 or other tax statements from the past two years, recent pay stubs, bank statements, investment account statements, and employment verification.
What happens after the preapproval process?
The entire process can take between one to three days. After you’re preapproved, you will receive a letter as evidence that a lender has verified your assets. This letter is typically valid for 60 to 90 days but varies between lenders and regions.
Once you receive your letter, you can start your home search and have a firm understanding of what you can afford.