What is a Pre-Approval you ask? Quite simply – it’s one of the most important first steps to take when you want to buy a house!
A pre-approval is a conditional statement from a bank or credit union that notes whether they will loan you money to purchase a home and how much they will lend to you.
So why do you need a pre-approval?
- It allows you to know how much a bank or credit union is likely to lend to you.
- This can help your Realtor to narrow down the focus of homes to homes you can afford.
- You can show a home seller that you are prepared, willing, and most importantly able to purchase their home.
How to Get a Pre-Approval
You’ve decided you want to purchase a home now. Congrats! Now you’ll need to get your pre-approval. Ask your Realtor for a recommendation for a great loan officer or if you already have a relationship with a bank or credit union, start a conversation with one of their loan officers. I recommend using a local institution but you can certainly go to the big box banks (think Bank of America).
Your loan officer will ask you several questions about your life and income. A lot of these questions may seem intrusive as they related to your income, assets and liabilities, but it’s important to remember that your loan officer needs the answers to these questions to help qualify you for a loan and to make sure you are able to afford a loan.
Your loan officer is going to ask for several things to help aid in the process of pre-approving you including
- Prior years’ tax returns – usually two
- Pay stubs from your current job – I recommend collecting at least 2 months
- Evidence of any other income:
- Interest or Dividends
- Alimony or Child Support
- Rental Income or Other Side Businesses
- A list of all of your debt (car payments, credit cards, etc.)
After your financial institution collects this information, they will issue you a pre-approval letter. This will state your names and how much the bank is willing to lend to you. This is important because it identifies the highest price of a home that you can expect to purchase. For example, if your letter says that you are pre-approved for a loan up to $250,000, you are not going to want to be looking for homes that are listed for $300,000, because the bank/credit union will not lend that much money to you.
Rejected?
At this point, the lender may inform you that you are not qualified to get a mortgage, and if this happens, they should inform you why. It could be because of a low credit score, not enough income history, or unreliable income (like if you just started a business and have no way of knowing how much you can reasonably expect to make each month). If you are rejected, make sure you understand why and ask your lender how you can address these issues so that you can plan out how you can improve your situation before starting to look for homes again.
I got my pre-approval, now what?
After you get your pre-approval letter, be sure to forward this to your Realtor. This helps your Realtor to know what types of homes they should paying attention to for you. Additionally, having a pre-approval gives you a tremendous advantage when making an offer on a house over another prospective buyer who doesn’t have one.
Think about what we’ve learned so far – a pre-approval is a bank’s opinion that they will likely lend to you a certain amount of money.
This also tells a seller that you are able to purchase their home. It’s in a seller’s best interest to make sure that any offer they receive is accompanied with a pre-approval since there is a provision in the standard Missouri real estate sales contract that gives a Buyer the option to get out of the contract if they can’t get financing. Having a pre-approval reduces the chances that the Buyer will have to use this provision to get out of your sales contract and make you have to put your house back on the market.
In the event that a seller receives multiple offers, you can bet that the offer they end up accepting is going to be one that is accompanied by a pre-approval. Be that Buyer – be the one with the pre-approval!
Want More Info?
Have other questions about pre-approvals? Let me know!
Also, be sure to check out 4 Tips Getting Your Offer Accepted to improve your chances of having your offer accepted.