A pre-approved mortgage is a tentative promise a lender makes where it states that it will provide you a certain loan amount for the purchase of your property at a certain interest rate for a certain period of time. In a pre-approved mortgage process, the lender’s decision is based on two factors- your income and your credit score. A pre-approved mortgage is not a final decision and is valid for only 90 to 120 days.
Ho does a Pre-approved mortgage work?
Suppose someone wants to buy a new house, before moving into real estate markets, he will go to a mortgage broker to complete a mortgage application and to provide his income and credit score information to the broker. After checking and reviewing your submitted documents, the broker will contact the lender to find out whether that person is eligible for mortgage loan qualification or not. The broker will receive offers from various lenders to lend that person the amount needed with particular interest rate. Lenders provide a statement to show that person is “pre-approved” for that amount, based on certain conditions as per the lenders requirements.
Why get a pre-approved mortgage?
Pre-approved mortgage helps in a variety of ways. It saves your time in looking for homes at your price range. Also, it makes your property dealer acknowledged about your seriousness in purchasing a house. By this, you will receive faster-targeted service. It also gives a green signal to the seller that you are not facing any issue in your financial purchase.
A mortgage pre-approval comes with great benefits. It is very helpful in the home buying process. Following are the ways in which you will find how mortgage pre-approval is helpful in your home purchasing:
- A pre-approved mortgage makes the financial decision of buying house solvent. It removes your guesswork and doubt on whether you are financially capable of purchasing your dream house or not.
- Mortgage pre-approval helps buyers to negotiate much better than buyers who do not have pre-approved mortgage loan.
- By getting mortgage pre-approval, you can determine much better on the price range of the house you can afford to purchase. It is worse when you fall in love with the house and later discover that the house’s price range is beyond your limit. Conversely, without pre-approval of a mortgage, you can miss out on a house you want to purchase.
- Mortgage pre-approval makes you a strong, solid buyer who is fully capable of buying the house and satisfying all aspects of sales and purchase contract. Moreover, offers from buyers with a pre-approved mortgage are more accepted by the sellers. It extremely helps you when you are involved in several office situations.
- Once you signed the purchasing contract, your pre-approved mortgage loan will help in closing your deal process as most of your required documents are already submitted to the lenders.
How to get a pre-approved mortgage
In order to get a pre-approved mortgage, you have to meet the broker or the lender. There, he will ask you a series of questions regarding the amount the lender will lend you. Following are the documentation you need to supply to your broker or lender in order to qualify for a pre-approved mortgage loan:
Your credit score is one of the most important factors in determining the qualification of your pre-approved mortgage loan. If you have a credit score between 680 and 900, then you will qualify for a mortgage with an “A” level lenders such as major banks of your area.
If your credit score is below 680 and above 600, you will not be able to qualify from a major bank. You will have to go through “B” level lender such as Home Trust.
And if your credit score is below 600, then you will not be able to qualify for a pre-approved mortgage loan.
The better your credit score the better your interest rate and faster you can pay off your loan.
Down payment is the amount of money you will pay in order to purchase your house. Your down payment size affects the loan amount you will borrow from the lender.
Debt Service Ratio
It is the ratio used by the lender to determine the largest monthly mortgage payment you can pay, based on your current income level, your expenses and debt. This ratio is used by lenders to know whether you will be able to afford your monthly mortgage payment or not.
A pre-approved mortgage is just the first step in the home buying process that will make everything else much easier. Most sellers and their agents are asking for offers from buyers which are accompanied by pre-approved mortgage letters from the lender.