First Time Home Buyers: Pre-Qualified Vs. Pre-Approved
Pre-Qualification vs. Pre-Approval
One of the first things you should do when preparing to buy a home is talk to a mortgage lender. When searching for a home, no seller or agent will take you seriously if you have not yet spoken to a mortgage lender. The mortgage lender will be able to take your personal financial information and estimate a loan amount that you qualify for based on your income and credit history. Once you know this information, you and the seller can have more confidence that you qualify for the home you are interested in. While working with mortgage lenders you will hear “pre-qualification” and “pre-approval” and there is a difference between the two terms.
When you are pre-qualified for a mortgage loan, you do not have a guarantee on the mortgage or the rate offered. When you are ready to make an offer your total cost of the loan could drastically change depending on market rates later. Being pre-qualified does not mean you have a loan approved and can make a seller a bit wary of accepting your offer.
When you are pre-approved for a mortgage loan, you have a guaranteed mortgage at a specific rate. This also helps when negotiating, but provides you the buyer more security knowing that your rate will not increase when your offer is accepted. Either way, you are not obligated to get a mortgage loan from that lender if you are approved or qualified.
Personal Financial Documents
When you contact a lender to become pre-approved or pre-qualified you will need to provide personal information. Pre-qualification information is based on your input to questions and not verified by the bank, giving it less credibility when dealing with sellers. In order to become pre-approved you will need to provide more documentation that proves your financial status. Here are a few areas you will likely be asked to provide some documentation on.
Proof of employment
Lenders want to ensure you have a work history without any large gaps. If you haven't had your job for 18-24 months, some lenders will see this as a negative as they do not want to loan money to someone who will not be able to bring in enough income to cover the loan payments.
Proof of pay and deposit
You will likely need to show the lender pay stubs or your yearly W-2 form that shows your income from your employer for the previous year. This proves to them that you earn what you say you do. Some lenders may take it a step further and ask to look at your bank deposits to prove that your paychecks are deposited to your account and there aren't any other random bills you are paying that may impact your debt-to-income ratio.
When applying for a loan, lenders will pull your credit report to view your rating. This gives a good snapshot at your history and likeliness to repay a loan on time. Lenders work really hard to loan money to candidates who are low risk and can repay loans without going into default.
Your debt-to-income ratio is all your monthly debt payments combined and divided by your gross monthly income. Lenders use this to measure your ability to manage the payments you make every month to repay the money you have borrowed. For example, let's say you earn $5,000/month gross. Your expenses you pay monthly include your mortgage at $1800, credit card bill is $100, school loans $200, your total monthly payments are $2,100. To find your ratio, divide $2,100 by $5,000, bringing your ratio to 42%.
Lenders may ask for additional documentation from you as well when getting pre-approved. It can be an arduous process, especially if you are not organized. This is why sellers will almost require you to be pre-approved prior to making any offer on a home in order to prevent any delays in selling their home.
As you can see, buying a home can be a whirlwind and having a professional to talk to can ease your mind and make the process enjoyable. At Faira, we offer an Offer Assist program where you can have access to a Realtor and still receive 3% back on any home you find. To find out more click here.