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If you have decided to begin the search for a new home in 2020, you’ve likely found that there is some competition in the market. In fact, a recent article from Edina Realty noted that Minneapolis and St. Paul were among the nation’s most competitive housing markets last year for homes under the $500,000 price point.
In order to create a strong offer, it is important to take the necessary steps with your lender ahead of starting your home search to show your Realtor, as well as the sellers of the home you are interested in, that you are the right buyer.
For starters, do you know the difference between loan pre-approval vs. pre-qualification? Although both terms sound similar, there is a significant difference between the two when it comes to home loans:
Pre-qualification is a process that gives you a ballpark dollar amount of how much money a bank will provide you in a home loan.
By contrast, pre-approval means that a bank commits to financing your mortgage for a specified amount of money.
Real estate professionals know that one of the surest ways to get a seller to accept your purchase offer is to prove that you can obtain a home loan. Having a general idea of how much money you can borrow won’t impress a seller. A loan pre-approval letter gives the seller faith that the sale will go through successfully if they accept your offer to purchase their home. Many Realtors request a pre-approval letter before they will begin to show you homes.
Selling a home is stressful, and no homeowner wants to accept an offer only to see the sale fall through because the buyer couldn’t obtain financing. Showing a seller that you have loan pre-approval is a terrific way to strengthen your offer and secure your dream home.
Along with impressing a seller, you will also benefit when you obtain preapproval for your home loan. After receiving your pre-approval, you’ll know precisely how much money you can afford to spend on a house. Knowing this price range will save you time during your house search. It also helps to prevent the heartbreak that comes when you fall in love with a house that you can’t afford to purchase.
Another perk of a loan pre-approval is that you’ll have the ability to close on your new home more quickly. Indeed, the entire lending process speeds up if you go into it with pre-approval. It might be possible to complete the sale within several weeks rather than the more common thirty to sixty-day period.
Loan Pre-approval Basics
Essentially, loan pre-approval means that a financial institution commits to giving you a home loan for a specific amount of money. For example, your lender might agree to lend you two hundred thousand dollars if you contribute twenty percent to the total amount of the purchase price. Pre-approval is a substantial commitment from the lender that you can use as a robust bargaining tool when you house shop.
As you can imagine, there is a more extensive process to loan pre-approval. A lender risks losing money if you default on your home loan, so they want to be sure that you have the resources to repay the loan. Because of this, a reputable lender will keep your best interests in mind when working with you to determine a loan amount that corresponds with a realistic monthly payment amount for your current lifestyle and financial situation.
Examples of items that a mortgage lender will consider when determining whether to approve your loan application include:
- Credit Report
- Employment Verification
- Sources of Additional Income
- Bank Statements
- Debt to Income Ratio
- Down Payment Amount
You can view a detailed list of what Firefly looks at under the “What to Expect” section here
When you begin to think about becoming a homeowner or moving to a new property, you should start by obtaining a copy of your credit score from a credit-reporting agency. Viewed as a snapshot of your current credit standing, lenders use this score to determine your eligibility for a mortgage. Although it’s absolutely possible to obtain a loan with a fair credit score, you’ll have the most attractive loan options with an above average score.
Luckily, a credit score changes all the time, and there are action steps you can take to improve a subpar score. In general, your rating will rise if you make on-time payments as you pay down the balances on your credit cards and loans. Read here
for more tips on improving your all-important credit score.
Purchasing a home is a compelling investment in your future. Understanding loan pre-approval gives you a head start on your home search. When you take the time to go through the home loan pre-approval process, you’ll benefit from knowing your price range. Having a pre-approval letter in hand also helps to make your offer on a home more likely to succeed.
Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.