Mortgage loan preapproval: What it is & how it helps you
Before the exciting process of house hunting can get underway, prospective homebuyers must be preapproved for a mortgage.
Preapproval provides a clear picture of what a borrower can afford and acts as a starting point to begin narrowing down affordable home buying options.
While preapproval does not guarantee a loan, it does provide a conditional agreement that a mortgage loan will be granted by a lender. As an official status of eligibility, preapproval encourages sellers to move forward with an offer, given the added assurance that a prospective buyer’s loan will be secured.
How to get mortgage preapproval
The preapproval process involves a thorough examination of a potential borrower’s financial situation to determine their price range and mortgage loan options.
A borrower’s credit score, debt to income ratio and employment history are among the many factors that determine affordable loan options and preapproval status. While this information may have been provided by the lender during prequalification, preapproval is where this documentation is verified and deemed factual.
Difference between preapproval & prequalification
Mortgage preapproval status is determined after the borrower has prequalified for a loan. Prequalification describes the lender’s ability to grant a loan based on the documentation submitted by the borrower. This documentation typically details the borrower’s financial status and is used to gauge the terms of the mortgage and what options the borrower can afford.
Prequalification provides all parties with an assurance that if a loan process moves forward, the borrower is creditworthy and can pay back the loan. While prequalification indicates that the loan process can continue, it does not provide definitive assurance that a loan will be preapproved. Preapproval can only be granted once the documentation submitted during prequalification is verified.
Loan officers will then confirm the details provided during prequalification, such as employment verification, credit history and proof of assets, to determine preapproval status.
Benefits of preapproval
Purchasing real estate can be a complicated process, requiring realistic expectations and a thorough understanding of the many factors that go into buying a home. For this reason, it is always best to begin the mortgage process with the help of a loan officer.
Prospective buyers sometimes make the mistake of researching home options prior to getting preapproval. With their heart set on a new property, these buyers will then file for a mortgage application, only to discover unexpected hurdles down the line that prevent the sale from going through. Meeting with a loan officer as the first step in the mortgage process will ensure that a borrower can explore home options with confidence and avoid costly and disappointing setbacks that could hinder a sale.
Selling a home, as well as buying one, can be a demanding endeavor. When moving forward with a proposal, sellers risk missing out on a better or timelier offer should the buyer’s loan fall through.
Starting over with a new buyer is a time-consuming and costly hurdle that home sellers and their real estate agents will always seek to avoid. A letter of preapproval indicates to sellers that a potential buyer is committed to buying a home and is motivated to complete the sale. The added assurance from a qualified lender shows that adverse events are unlikely, and the transaction can be expected to conclude free of unexpected hurdles.
Limitations of preapproval
Preapproval may provide a good idea of what a borrower and lender can expect during the home buying process, but it is far from a guarantee that the sale will move forward without interruption. They are not meant to act as the final word of approval when applying for a mortgage.
Letters of preapproval are often conditional and based on the borrower’s current financial standing. If a borrower was laid off from work, for example, their financial situation would no longer suit the terms of the previous agreement and their preapproval status could be revoked.
Additional fees such as appraisal costs and homeowner’s insurance might not be factored in to the preapproval’s estimate. Borrowers should continue to assess their own finances and plan for possible future expenses even after getting preapproved.
Preapproval allows prospective buyers to search for a home with a quality estimate that they can afford. This reassurance not only helps home buyers shop with confidence, but will also go a long way in avoiding potential interruptions to the sale down the line.
It is always best to begin the home buying process with the help of a trusted lender who can guide the loan’s progression from preapproval to closing.