For home buyers, there has not been a better Mortgage Loan time to go house shopping in the past several years. Falling home values, an increase of homes available on the market and record-low mortgage rates have made it a buyer’s market when it comes to houses. But whether you’re a first time home buyer, you’re looking to upgrade to a larger house for your family or you’re looking to downsize for retirement, there are a few things you need to do first.
Before you contact a real estate agent, go looking for homes or even try to figure out your budget for a new house you’re going to want to get a pre-approved (or pre-approved) loan letter from a bank or lending institution and to do that you have to do some work.
When you first begin investigating how to buy a home you’ll quickly learn those home sellers and realtors strongly advise you to get a letter of preapproval or prequalification from a bank or lender. Some organizations use the two terms interchangeably, but most financial institutions clearly recognize a preapproved home loan vs. a prequalified home loan.
Prequalified Mortgage Loan
Getting prequalified for a mortgage is relatively simple. You call the mortgage department of your bank or lender and explain that you would like to get prequalified to borrow money to buy a house. They will ask you some basic questions, they may require a few minor pieces of paperwork such as a copy of a paycheck or other general proof of income.
They will ask you a little bit about your current debts, obligations and living situation. It is a relatively short process. Once you are done the bank or lender will give you an estimated amount of money they would be willing to loan to you based on the conversation and information you provided.
The amount will usually be sent to you in a prequalification letter and the qualification is usually only good for 60 or 90 days from the date of being issued. To get prequalified for a home loan usually doesn’t cost anything but it also doesn’t prove very much. There is no commitment on the part of the bank to loan you the money.
Preapproved Mortgage Loan
Getting preapproved for a loan is much more difficult, but it puts you in a much better bargaining position if you find a house you want to buy. The mortgage pre-approval process is much more stringent than the prequalification process and it will require you to provide lots of proof of income including multiple paycheck stubs, federal tax statements and they will most likely run a credit report.
After all of that information has been gathered by the bank they will let you know how much they will be willing to give you.
With a preapproved mortgage loan the bank is essentially committing to give you a loan for a specified amount, with the understanding that the borrower can afford the terms they list. This puts you and your realtor in a much better bargaining position if you find a home that you want to buy.
If that same home is being bid on by three potential buyers and you have the only preapproved mortgage loan letter then the sellers will most likely sell the house to you because they stand a much better chance of having the sale go through.
Remember that a preapproved mortgage loan is a commitment, but not a 100% guarantee that a lender will loan you the money. The bank can still deny you the loan if they don’t feel that the house is valued correctly, there are irregularities in the title search or if additional financial checks turn up other issues.
When working for a bank to get a pre-approved mortgage loan you want to be upfront and honest because anything found at the last minute could cause the bank to drop all commitments to you and not be willing to work with you again.
At that point, you’re back to square one in the buying process and you probably wasted a lot of your time and energy as well as that of your real estate