By: Diana Carvajal-Hirsch, Mortgage Advisor, SVB Private
Many people dream of homeownership but most do not have enough savings to pay the full home purchase price. Chances are they will need to obtain a mortgage. But how does one know if they will qualify to be approved for a mortgage loan?
There are two important qualification strategies for would-be homebuyers to know: mortgage loan pre-qualification and mortgage loan pre-approval.
A mortgage loan pre-qualification is a quick, simple process in which the loan applicant shares his or her relevant financial information with a loan officer. Based on the information provided, the loan officer can provide an idea of the mortgage amount for which the homebuyer is likely to be approved.
Obtaining a loan pre-qualification can also offer valuable insight into what different lenders have to offer, including information about their products, rates, financial assistance offered, and overall process. This can help you identify the lender or lenders that best match your specific needs.
Going through the pre-qualification process can also serve as a helpful tool to determine whether you are really ready to buy a home, or perhaps better served by waiting a bit longer to strengthen your financial position, narrow your focus on homes you can afford, or otherwise have the best chance of successful home ownership. The pre-qualification process is a simple one and in most cases does not require a credit check, which can negatively impact your credit score.
Though a pre-qualification can be valuable, it is not the strongest indicator of eligibility for a mortgage. An even better indicator is a mortgage pre-approval.
A mortgage pre-approval is a more involved process requiring full verification of your income, credit, assets and liabilities. This process requires a credit check and you will need to provide financials like tax returns, paystubs, bank statements and any other information the lending institution and their underwriters require to make a credit decision. A mortgage pre-approval is completed in writing and is valid for 90-120 days depending on the lending institution.
Some lending institutions submit pre-approvals though a pre-underwriting process, which makes the pre-approval a strong predictor of being approved for a mortgage when the homebuyer is ready to make an offer on a home. Every borrower will have to go through a complete loan underwriting process at some point whether it is with a pre-approval or the final mortgage application itself. If you have a pre-approval that has gone through a complete underwriting process, that is the strongest indicator that you are ready to be approved for a home mortgage.
Guidance for First-Time Homebuyers
For first-time homebuyers planning to purchase a property in the near future, consider taking a First-Time Homebuyer “FTHB” class. Such classes are a valuable, low-cost resource where borrowers can learn about each step of buying a home, including the mortgage process, different mortgage products, financial assistance programs you may qualify for, and other valuable information.
After taking a FTHB class, consider getting a pre-qualification, preferably one not requiring a credit check. Reach out to different banks — particularly those who participate in special first-time homebuyer programs — and learn more about their offers and programs. By doing so you can choose the lender you feel is the best fit for your needs in the pre-approval process and avoid having multiple lenders pulling credit reports.
As a final step, choose the lender with which you want to work and submit your pre-approval application. Obtaining a pre-approval will take longer than a pre-qualification and will require time commitment from you and your loan officer – but it is well worth the additional time and effort. By successfully obtaining a pre-approval you will gain peace of mind that you are prepared to qualify for a home mortgage, and will have also strengthened your offer to purchase a home.
A good realtor will highlight your pre-approval to the seller as part of your offer to purchase a home. This can increase your chance of having your offer accepted, if the seller perceives there is a high chance your mortgage will be approved at the purchase offer price made for the home.
Once you have gone through the process to obtain a loan pre-approval, review it and make sure you understand the terms and financing conditions that you will need to meet for the loan. Follow up with the loan officer to get an estimate of the principal, interest, taxes and insurance (or “PITI”) expenses expected for your planned home purchase. Conduct a review of your personal income and expenses to make sure the PITI is something you can afford.
Keep in mind that if there are any changes in your financial picture after you have been pre-approved, you will need to update your loan officer to make sure the change does not have an impact on your pre-approval.
Obtaining a solid pre-approval prior to submitting an offer to purchase a home will take a commitment of your time and effort but in the end, it is the safest and best way to prepare yourself to qualify for a mortgage at a home purchase price you can afford.
Congratulations on taking this next step in your mortgage qualification. Best of luck and happy home buying.
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