A few weeks ago, we defined some of the real estate terminology that we, and other Realtors, use throughout the home buying and selling process. Over the next couple of months, we’ll explain some of the terms in greater detail to help first-time buyers and sellers learn the lingo. We’re starting with a term that confuses a lot of buyers and potential buyers; it is the idea of being pre-approved for a home loan. Plenty of buyers and sellers don’t understand the value of a pre-approval letter because they don’t really know what it is.
Pre-approval is a process that a home buyer goes through with their mortgage lender. Someone serious about buying a new home will provide information and documents that prove income, debts, credit history and overall finances to a bank or mortgage company in order to determine how much they can borrow toward a new house. After reviewing the buyer’s financial position, the bank or mortgage company will provide both the total amount they will lend and the mortgage rate. Mortgage amounts vary by situation and rates fluctuate based on market conditions, so the mortgage lender provides a letter that indicates what the buyer is eligible to borrow from the bank or loan company. Borrowers (buyers) with better credit typically see a lower interest rate for their mortgage and borrowers with a higher income can typically borrow more.
A pre-approval letter may have an expiration date, but it is not tied to a particular property, which means that a buyer can obtain a pre-approval from their letter as they begin a home search before they choose a specific house. Some agents in a tight market will require that all offers include a pre-approval letter to ensure that any potential buyers are serious about the house and qualified to borrow the amount of the loan. In other markets, a buyer’s agent might prefer to work with buyers who are already pre-qualified. This saves the agents time and avoids offers from buyers who may ultimately not qualify for a loan and have to pull out of the contract before the purchase is complete.
If you’re certain that you want to buy a new house, it can be helpful to get a pre-approval letter as you begin your search. Your pre-approval letter can be included with your offer to indicate that you’re a serious buyer and it may save you time in the final mortgage application process since your bank or mortgage company will already have access to your financial history and the majority of the information they need to process your loan.
Good luck with your new home search. We’re here to help, so if you have questions about the home buying process or you would like us to suggest a great mortgage lender, give us a call or fill out the form on our website to get in touch.
Enjoy the Adventure!