Why a Mortgage Preapproval
Why Should I Get a Mortgage Preapproval Letter?
What is a mortgage preapproval and why would I want to get one? Short of a formal loan commitment, there are two types of letters that a lender will issue to help a house hunter in the purchase of a home.
A prequalification letter is one that is issued by a lender after reviewing certain financial information submitted by the buyer. This letter is rather broad and gives an estimate of the amount of a mortgage that the buyer may qualify for.
A preapproval letter is one that is issued by a lender after reviewing and verifying all of the financial documents that are required for a mortgage application. The lender then issues a letter stating exactly the amount of a mortgage they would be willing to extend to the borrower.
Many realtors agree that going house hunting without a mortgage preapproval letter is like shopping in a grocery store without any money. And yet, many home buyers don’t bother to get it.
Mortgage underwriters say that the documents needed for the preapproval letter are the same as those that you are required to submit with any mortgage application. These documents are the following and are not all-inclusive:
- Several months of pay stubs
- W-2 forms for the past two years
- Federal income tax returns for past two years
- Two months or more of current bank statements
- A current credit report
Even though the mortgage preapproval letter is not a letter of commitment, it does help to speed up the loan approval and underwriting process.
Before you go house hunting, consider the following four reasons why it will benefit you to get a preapproval letter.
- The real estate market is very competitive.
Quite often, home buyers are more interested in looking at homes and don’t want to get involved with the tedious and sometimes mundane end of the home buying process. However, because the market is competitive, every serious home buyer really needs to get this letter before looking for a home.
- Your offer may not be accepted without the mortgage preapproval letter.
Many realtors and lenders alike, say that it’s not at all unusual to find home buyers who don’t bother to get the preapproval letter in advance. It still happens too frequently, and some realtors will refuse an offer without one.
- Many realtors verify the information in the letter.
They will make sure that it’s a bona fide preapproval. They call the lender to verify that not just the credit was considered, but also the buyer’s tax returns and bank statements.
- It’s important that you and the seller know if you will be approved.
There are some homebuyers that procrastinate because they have some concern that they may not be approved for an amount they are planning to spend. It’s better to know up front if you will be approved for a certain amount rather than wait until you have found your dream house, and then get declined.
Then there are some other home buyers that don’t want to share their personal financial information with a lender until they have found the home they are looking for.
There are so many factors that are considered by lenders that will qualify you for a home mortgage, that no two situations are the same. Even if a friend and yourself earn the same, and you both have good credit, one may qualify for a higher loan than the other.
A slight difference in your credit score can mean a higher rate of interest, a higher down payment, and even the loan term and points.
Another good reason for getting a preapproval letter is that if there is an error on your credit report, you’ll have more time to get it corrected.
We recommend that you get a mortgage preapproval letter to maybe avoid having an offer being refused and to correct any other errors if any in your credit and financial information.