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Pre-approval letter: Your easy guide to a faster loan origination


It is wise to get pre-approved for a mortgage before you search for your dream home. Getting pre-approved is an assurance by the lender that you're qualified to get a loan upto a certain amount. But unfortunately, many prospecting buyers do not understand the importance of getting pre-approved. Actually most of the new-home buyers are unaware of the pre-approval facts. So, before plunging into the housing market, you should know some aspects of pre-approval to enhance your chances of getting a home loan.

What does a mortgage pre-approval letter mean?

A mortgage pre-approval letter is nothing but a written report or statement where the lender certifies that the borrower can qualify for a certain amount of mortgage loan as per the lender's criteria. The lender acknowledges your financial status as authentic & also certifies your payment capability. A pre-approval can remain active from 60-90 days.

Is it important to get pre-approved?

There are several reasons to get a pre-approval letter before searching for a home. You will get a clearer picture about how much you can afford to pay for a home loan. It will help you to determine the best available house in your price range. When you will approach a real estate agent & a seller to make the purchase offer, they will ask for the pre-approval certificate from you. It will prove your credit-worthiness to both the parties & your chances of signing the deal will be quite high. Some of the sellers may reject your purchase offer if you can't submit your pre-approval letter on time.

How do you get pre-approved?

Before applying for a mortgage, you must know the steps of mortgage application.
There are three main stages 1) Pre-qualification, 2) Pre-approval and last but not least 3) Mortgage commitment by the lender.

Pre-qualification consist of an informal step where the lender will ask you about your income & expenses. It is for determining your price range limit & help you to select a house which you can afford.

As I said earlier, pre-approval letter verifies your potential as a buyer. It is not only a proof of your loan affordability but it also indicates the kind of loan that would be suitable for you.

The lender will approve your mortgage application & issue a loan commitment. After verifying the documents, the loan officer will forward your application to the underwriter for the final evaluation. You can expect four decisions according to your application – a) Denial, b) Suspension [more documents required], c) Approval or, d) Approval under certain conditions.

Details required for getting pre-approved

Proof of a good credit history – Lenders always prefer homebuyers with a good credit score. It is seen that borrowers having a credit score of 740 or more might get the best deal, i.e the lowest interest rates from many lenders. Other borrowers having a comparatively low credit score are generally offered higher interest rates or they have to pay discount points to lower the rates. FHA loans are normally approved if the borrower have a credit score of 620 or above. In case, there is any co-borrower associated, his/her credit score will be also be taken into consideration.

Employment status – The lender will check your employment status before giving the approval. Your current employer might be asked to verify your employment details. In case, you have taken up a new job, the lender may want to contact your previous employer. Self-employed potential home-buyers might need to show additional documents & income proof regarding their business.

Income proof – The borrowers need to provide their personal bank account statement, W2 statement of last two years, current pay stubs and additional income proof such as royalty, bonuses, VA retirement benefits, child support and so on. Current two year's tax return papers is also required for the pre-approval.

Assets – Borrower's bank statement & investment account details plays a very important role in pre-approval process. These are might be the proof that you have the required amount in your account as downpayment. Conventional loans require 10 to 20% as downpayment , where on the other hand FHA comes at as low as 3.5%. If you do not have sufficient balance in your account, you can get that money from your friend or relatives but you'll need the gift letter to certify that money as gift.

Identification – Your lender will ask you to submit a signed copy of your driver's license & your social security number. These documents will help the lender to fetch your credit report from the credit bureaus.

What you must do before the pre-approval process

* Recheck your credit report for any unwanted errors.

* Check if there is any move you can make to improve your credit score quickly.

* Gather up the required bank documents, probably last two years of tax return.

* Do not withdraw down payment & closing cost money saved in the bank before 60 days.

* Collect your rental payment receipts, if you are living in a private rental property.

* Stay away from making any major purchase using your credit card.

* Do not apply for new credit cards or cancel any existing ones.

* Don't be late on your credit card payments so that no negative item gets reported on your credit file.

* Never ask your creditors to lower your credit limits.

You must consult your loan officer about all the required aspects of getting the mortgage pre-approval letter. If you are not approved at first, try harder the next time & ask your lender to suggest you some tips to increase your chances of getting mortgage pre-approved.

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