Finding the perfect home takes time. And when you finally do find your dream home, having a letter of pre-approval from a financial institution can help make sure you’re ready to snap it up. But pre-approval letters don’t last forever, and depending on how long you spend shopping around, you may need to renew yours to be fully prepared.
What Is a Mortgage Pre-approval Letter?
A letter of pre-approval can be an essential part of the home buying process. It shows sellers that you are serious about buying a home, and that a bank is likely to give you a mortgage quickly.
Letters of pre-approval typically last for about 90 days . That time frame tends to work, since homebuyers, on average, shop for a home for around three to six weeks . However, home buying isn’t necessarily a process you want to rush. If it takes you a bit longer to find the house you want, that’s okay.
Mortgage Pre-approval vs. Pre-qualification
Since they sound similar, it’s worth mapping out the difference between the two pre-approval types that you can get from a lender before you buy a home: pre-qualification and pre-approval.
Pre-qualification is a key first step in the mortgage process. To get pre-qualified, you may discuss your income, credit, and assets with your lender in order to get a sense of the loan program and rate you might receive from that lender. While you may provide documentation, it isn’t typically verified at this stage in the process.
Banks will look at this information, but won’t necessarily spend time verifying it by running a credit check or calling your employer, for example. The pre-qualification process gives you an idea of how large a loan a lender thinks you can afford.
This estimate is useful, because it can give you an idea of how much house you may be able to afford. Pre-qualification can also give you an idea of what your monthly mortgage payment will look like. However, pre-qualification does not mean that a lender is guaranteeing you a loan, because at this stage, your loan qualifying information is typically not verified.
The pre-approval process, on the other hand, is a more in-depth examination of your income, assets, and credit, and it represents the next step toward buying a home. When considering you for pre-approval lenders will typically request:
• Proof of income: You’ll need to show pay stubs, W-2s and tax returns from the last two years. You’ll also need documentation of any additional income you receive, such as work bonuses.
• Employment: In addition to paystubs, your lender will likely call your employer to make sure that you still work there and to verify how much you are paid.
• Assets and liabilities: You’ll need to show the bank what types of assets you’re holding such as cash in bank accounts, investment accounts, and other properties you own. Looking at these assets helps provide the bank with proof that you have enough cash on hand to afford your down payment, closing costs and still have cash reserves. The lender will also look at the liabilities, or debts you are already obligated to pay, which might impact your ability to pay off your mortgage.
• Credit score: Your credit score helps your the lender determine how you manage your credit. Your credit score is a numerical representation of your credit history. It shows whether you have taken on debt in the past and whether you have a history of paying your financial obligations in a timely manner.
Once your lender has gathered the information they need, they may offer a letter of pre-approval. This letter states the maximum mortgage amount that you have been pre-approved for, how long the letter is good for, and any “subject to” conditions that need to be met for final loan approval.
Pre-approval helps you compete with buyers who are buying in cash. Some sellers won’t even consider offers that don’t have at least pre-approval, so this letter makes it more likely they will select your offer on a property.
That said, it’s possible that even with a letter of pre-approval, a bank may choose not to issue a mortgage. A bank might withhold final approval if they discover previously undisclosed financial information that changes qualifying eligibility, or if the property you wanted to purchase is not eligible for lending because of condition, for example.
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What to Do When Your Pre-Approval Expires
You’ll notice that your pre-approval letter has an expiration date on it. After that day, it is no longer valid and you can’t use it to shop around for homes or take the next step to finalize your mortgage.
Banks will put an expiration date on pre-approval letters because they need to have your most up-to-date financial information on hand. The credit, income, and asset items they reviewed for your pre-approval typically need to be updated after 90 days.
For example, you might leave your job and no longer have a steady income, or a financial emergency may have taken a big bite out of your savings. As a result, the bank will want to reassess your finances.
If you’re using the same lender you will need to show them updated pay stubs and bank statements. Additionally, your bank may check your credit again, which may have an impact on your credit score.
You can minimize the effect of these so-called “hard pulls” by avoiding seeking renewal when you’re not actively shopping for a home and by working with only one lender during the pre-approval stage. If your finances have mostly stayed the same, your bank is likely to renew your pre-approval.
Finalizing Your Mortgage
If you find a house while your mortgage pre-approval is still valid, you can move on to the next step: finalizing your mortgage application. At this point, in many cases, lenders will check again to see if there have been any changes to your financial situation that will impact your loan.
Buyers may want to minimize changes at this point. For example, consider avoiding applying for any other new loans or credit.
Once you fill out the mortgage application, an underwriter from your financial institution will review it. If the terms of the pre-approval, such as a satisfactory appraisal, have been met, the lender can issue a final commitment letter. Your mortgage is not officially approved until you receive this letter. After you have the letter, a closing date can be scheduled.
Mortgage pre-approval is a crucial step when you’re buying a house. It helps you understand how much house you can afford thereby narrowing your search. And when you find the perfect home, it gives you a pretty good idea that you’ll be able to buy it if the buyer accepts your offer.
Without pre-approval it’s possible you would find the perfect home, only to discover you don’t qualify for a mortgage that would help you buy it. So take the time to go through the process and keep your letter up-to-date.
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