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How do I get preapproved for a mortgage?
Years ago buyers didn't worry about financing their home purchase until after they found the home they wanted to buy. Not so now.
Once they had an accepted offer, they'd shop around for a week or so and then submit a loan application. The recent low inventory of homes for sale has made home buying highly competitive in some areas. In order to compete, many buyers are now getting preapproved for the mortgage they need to complete the purchase-often before they even start looking at homes to buy.
There are two parts to a mortgage approval: approval of the borrower and approval of the property. Mortgage preapproval is a process whereby the borrower is approved for a mortgage of a certain amount. The approval is usually good for a period of time and is subject only to the borrower finding an acceptable property. An acceptable property is one with a satisfactory appraisal and a title report that indicates that the seller is able to transfer clear title to the property to the buyer. Final mortgage approval also requires a purchase agreement that is signed by the buyer and seller.
To get preapproved, talk to a lender or mortgage broker and fill out a loan application. You will need to provide verifications of your employment and the source of your cash for the down payment and closing costs. Employment can be verified with copies of paycheck stubs, W-2's or tax returns if you're self-employed. You'll also need to give authorization to have your credit checked.
One of the benefits of being preapproval is that you know exactly how much you can afford to pay for a home before you enter into a purchase agreement. Another benefit is that you'll be in a better position to negotiate with a home seller. A solid preapproval letter from a lender should remove any concerns the seller has about your financial capabilities.
FIRST TIME TIP: Before you make an offer, make sure that your preapproval letter isn't simply a glorified prequalification letter. A prequalification letter simply states that the lender is likely to give you a loan of a certain amount if the financial data you've disclosed to the lender is satisfactorily verified. With prequalifiction, the lender doesn't have to give you a loan if your financial and credit documentation doesn't pass the scrutiny of the lender's underwriter.
Recently buyers received a letter from their lender that had the word preapproval typed at the top. Without first reading the letter, they included it with their purchase offer in the hopes of strengthening their offer. The seller's agent read the letter and discovered that the preapproval was conditioned upon the lender verifying the buyer's credit report, source of down payment funds and employment history. The letter was far from being a firm commitment from the lender to give the buyers the mortgage they needed to complete the purchase.
Be aware that mortgage brokers aren't lenders. They are middlemen who broker loans to lenders. A mortgage broker with years of experience may be willing to write a preapproval letter for you without first receiving lender underwriting approval. But, if there is anything unusual about your loan application like bad credit history, borrowed down payment money or short-term employment, make sure your mortgage broker has a lender's underwriter review your package before issuing a preapproval letter.
THE CLOSING: You may not need to include a financing contingency in your purchase offer if you have unconditional lender preapproval. However, you may want to include a contingency for the property to appraise for the purchase price.
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