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Mortgage Pre-Approval

Mortgage Pre-Approval


What is a Mortgage Pre-Approval?
A mortgage pre-approval refers to a lender’s evaluation that a potential borrower is credit worth enough for a mortgage up to a certain amount. When pre-approved, the lender will approach the potential borrower with a guarantee that should they want the mortgage; they will be guaranteed to receive the financing. 
People interested in purchasing a home can approach a lender, who will check their credit rating and verify their income to accept or reject the candidate in the pre-approval stage. A prospective buyer can receive a letter of pre-approval from the lending institution. This document—if the individual is approved during this stage—can serve as a possible advantage during the home buying process. The pre-approval document will ensure the prospective seller that the document-holder is most likely qualified to receive a mortgage and are thus able to purchase the home. That being said, a pre-approval letter does not guarantee financing to the potential borrower. 
The process of mortgage preapproval involves a submission of an application for financing and subsequently receiving an approval for a mortgage prior to selecting a property for purchase. A mortgage pre-approval may also be used in conjunction with a refinancing, however, for this article we will solely focus on home purchases. As stated above, a pre-approval is not a guarantee; the agreement is not a binding commitment on either the lender or the applicant. The pre-approval, thus, is simply an indication that the lender is ready, willing and able to extend financing to an applicant once a suitable property has been located and secured via a real estate contract. 

How does a Mortgage Pre-Approval Work?
The mortgage pre-approval process begins when a prospective home purchaser files a residential mortgage application with a targeted loan amount and sales price. The desired amount may change as the buyer evaluates different properties in the market; however, it is essential to establish a framework. After you have decided on the starting amount, the mortgage provider will review your application, credit history and depending on the mortgage sough, your income and down payment sources. This process will typically take between one and two weeks. 
Tips to Securing a Pre-Approval:
The first step to securing a mortgage pre-approval is shop around and shop early. When seeking a mortgage pre-approval you must talk to multiple mortgage lender to find the best financing avenue that fits your needs. 
Getting preapproved will require you to review and verify you income, credit and assets to ensure that you can make the necessary monthly payments on the purchased property. Your prospective lender will tell you what you need, but be prepared to provide the following documents:
Your W2 statements for the last two years
Federal tax returns for the last two years
Recent pay stubs or proof of income
Proof of investment income
Bank statements for the previous few months
Remember that a preapproval will only stipulate the amount of the monthly payment and the total amount of the loan, but not necessarily the type or rate of the loan. Do not expect a lender to keep the same rate they preapprove you with; when you apply for a preapproval, a lender will use that days mortgage rates to estimate your costs and payments. 

Why is a Mortgage pre-Approval Beneficial?
A mortgage pre-approval will remove a primary uncertainty when buying a home. You, as a prospective byer, can make an offer with confidence, because you know, through the obtainment of a mortgage pre-approval, that financing will not fail due to the determined mortgage underwriting decision. Moreover, a seller will also enjoy the comfort of knowing your sincerity and willingness to purchase his or her home. The seller also finds comfort in the fact that you secured pre-qualifying thus demonstrating a solid credit history and suitable income. 
What is a Mortgage Pre-Approvals Not Guaranteed?
Mortgage pre-approvals are based on your credit rating, your assets and your income. While the lender, through an evaluation of these factors, is expressing a desire to finance your mortgage, issues concerning the property might cause the institution to decline to participate in the financing. Examples of this situation include the following: the purchase price is not supported by the market appraisal of the home, the home has significant structural damage, the home has an open building permit, or the home has a feature which may limit the future marketability of the home (the property is stricken with chemical, biological or environmental hazards). The non-guaranteed aspect of the pre-approval mortgage thus, does not revolve around the applicant, but more so the property itself. Simply put, the lender does not want to get involved with an unproven or sketchy home or property. 
Another potential impediment regarding a preapproval is found in the fluctuation of interest rates. If interest rates spike, the basis for the preapproval will fluctuate and therefore the borrower may choose to decline the financing. 
How Long Does Preapproval Last?
In most instances, a mortgage preapproval will last 60-90 days. After this time the lending institution may require an update to the credit report or other variables within the application. Moreover, although the lending institution ultimately issued a credit decision in advance, it will typically reconfirm the date which led to the pre-approval. If any part (income, assets or credit rating) of your financial portfolio has changed you must alert the lending institution of the fluctuation so that the mortgage pre-approval can be adjusted or re-issued.