Kevin Mahoney, CFP® is a Millennial financial expert who founded Illumint, a virtual financial planning company for young families. As a fee-only financial advisor, he specializes in navigating the financial trade-offs that arise during our late 20s.
Kevin Mahoney ContributorKevin Mahoney, CFP® is a Millennial financial expert who founded Illumint, a virtual financial planning company for young families. As a fee-only financial advisor, he specializes in navigating the financial trade-offs that arise during our late 20s.
Written By Kevin Mahoney ContributorKevin Mahoney, CFP® is a Millennial financial expert who founded Illumint, a virtual financial planning company for young families. As a fee-only financial advisor, he specializes in navigating the financial trade-offs that arise during our late 20s.
Kevin Mahoney ContributorKevin Mahoney, CFP® is a Millennial financial expert who founded Illumint, a virtual financial planning company for young families. As a fee-only financial advisor, he specializes in navigating the financial trade-offs that arise during our late 20s.
Contributor Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
| Loans & Mortgages Editor
Updated: Aug 9, 2023, 12:48pm
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When Katerina Matsa and her husband became interested in buying a house in Washington, D.C. two years ago, she first turned to real estate listing websites such as Zillow and Redfin. Like many others, she was drawn to the seemingly endless photos of remodeled kitchens and newly planted gardens.
Once she was ready for more substantive action, she reached out to a real estate agent whom she knew through her social circle. She never considered contacting a mortgage lender, let alone becoming preapproved for a loan at this point in the process. “We immediately focused on a real estate agent because we had a connection,” she recalls. “We didn’t even think about a lender. In fact, we depended on our agent to recommend a lender for us.”
For most people, mortgage lenders hold the key to completing a home purchase. Yet, the ways in which they help potential buyers—such as providing a preapproval letter and ultimately extending a loan—remain unclear and undervalued.
In some cases, lenders may just market their services less prominently than real estate agents. In other cases, people may resist discussions about their financial history. And, for almost everyone, it’s just more fun to admire and tour homes currently on the market.
In reality, though, a home buyer is more likely to close on the house that they want if they contact a lender at the beginning of their search. What may feel to a first-time home buyer like the most intimidating part of the process will lead to less stress and disappointment in the months that follow.
From the seller’s perspective, a preapproval letter from a reputable local lender often can make the difference between accepting and rejecting an offer. As a result, buyers would benefit from educating themselves on the steps required to reach that point.
Mortgage preapproval is the stage between the initial prequalification and mortgage application. It essentially reveals how much a lender is willing to lend to you and what types of loans you qualify for in your current situation. Getting preapproved requires a hard credit check that impacts your credit score while prequalification typically does not.
Preapproval is an essential step for home buyers as it makes your purchase offer more competitive. Sellers are more likely to sell to someone who has already been preapproved for a loan versus someone who hasn’t.
It’s essential to note that mortgage preapproval isn’t a lender’s commitment to lend and you’ll still need to get approved for a mortgage when you decide to buy a home.
Here are three steps to follow to get preapproved for a home loan.
If you’re ready to begin house hunting, your first priority should be getting a mortgage preapproval letter from a lender. The preapproval letter shows the seller (and the real estate agent advising them) that you’re serious about buying the home and know how much you can afford.
It’s possible to get preapproved within an hour, but it can take up to 10 business days depending on how much documentation your lender requires and current processing speeds. Once you receive your preapproval letter, you can include it in your offers to home sellers to indicate you’re a serious buyer.
Visit AnnualCreditReport.com as early as 12 months before contacting a lender to get a free copy of your credit reports from the three national credit bureaus—Equifax, Experian and TransUnion.
You can save both yourself and your lender time if you can identify—and attempt to correct—any errors or major deficiencies in your credit history.
Comparing several mortgage lenders allows you to find the lowest rates and fees. Consider requesting preapproval from multiple lenders within a 45-day window to minimize the impact to your credit score. The credit bureaus treat multiple inquiries within this 45-day period as a single inquiry.
In addition, you may want to reach out well in advance of applying for preapproval or a mortgage—six to 12 months for instance—to get all your ducks in a row. Reaching out to a lender 12 months in advance “may seem too early,” says Christopher Jordan, branch manager for Main Street Home Loans in Silver Spring, Maryland. “But if there’s anything you need to work on, it gives us time to prepare. A credit issue may take four to six months to fix, and we want to make sure that we build enough time [into the purchase process].”
A first-time home buyer understandably might assume that all mortgage lenders offer the same thing: money to purchase a house. After all, mortgage lending is a competitive industry in which individual lenders—especially on the local level—rarely differentiate themselves in a publicly visible way.
Now that several large, national mortgage lenders have shifted the preapproval process online, buyers may feel tempted to proceed with the fastest or least-invasive option. Yet, small differences in mortgage lenders can help to avoid regrettable decisions and even secure meaningful savings over the long term.
A good mortgage lender’s preapproval letter should carry significant weight with the real estate agent responsible for the property that the buyer most desires. As a result, it’s important to choose a lender with a reputation for strong customer service and on-time closings.
Any lender can quickly preapprove a buyer for the maximum amount that their company permits based on certain variables. A listing agent will have learned over time, though, that these lenders’ customers are more likely to encounter issues before closing. This is one reason why real estate agents are a good source for finding a lender.
Agents have an incentive to work with lenders who can guide buyers appropriately and help ensure that they’re prepared to complete the transaction.
Michael Fischer, managing broker and vice president of Homestead Realtors in Atlanta, says, “I encourage my clients to use me as a resource, since I know local lenders who will do a good job. They can trust that I’ve vetted the lender previously and confirmed that he or she can get the deal done at competitive terms.”
Even so, Fischer encourages clients to contact more than one lender in order to obtain the best possible interest rate and gain access to different loan options. Ultimately, no matter which lender a buyer uses, a good agent will work to establish a relationship with that lender as part of building a strong team around the buyer.
You should consider getting preapproved if you’re ready to begin house hunting. With an active preapproval letter in hand, you’ll significantly increase your chances of having your purchase offer accepted.
Nowadays, many lenders allow you to get preapproved online. The main benefit of doing so is speed. While many lenders can take one to three business days to process your preapproval application and distribute a preapproval letter, some online lenders generate a preapproval letter the moment you submit the application.
To get a mortgage preapproval online, start by looking for a reputable online mortgage lender and make sure you have the following documentation:
Buyers often procrastinate on this task, if only because they don’t know where to start when selecting a lender. They also may feel wary about selecting the “wrong” lender, especially if they fear wasting their time or delaying their home buying timeline.
The speed at which a lender preapproves a potential borrower varies. It depends a lot on how quickly you gather and submit the necessary documents and how long it takes them to review your financial paperwork.
Once the lender has all your information, you should receive a loan estimate within three business days—much less if you use an online mortgage lender—that will tell you whether or not you’ve been preapproved and for how much.
The mortgage preapproval is not indefinite, but the length of time varies depending on the lender. Most mortgage preapprovals are valid for 30 to 90 days and then expire.
Mortgage preapproval and prequalification are different, so don’t confuse the two. Articles about home buying may mention both terms in the same sentence, but a buyer who becomes “prequalified” hasn’t actually accomplished much. This process typically only involves a conversation or a credit score review.
Since prequalification doesn’t verify financial data, identify red flags or address potential issues, it won’t improve a buyer’s standing with the seller’s team. Buyers have more to gain from focusing on preapproval, which will take more time but actually impacts the purchase effort.
Mortgage preapproval represents a lender’s offer to loan the buyer money based on certain financial circumstances and specific terms. The lender reaches this point only after reviewing and confirming the buyer’s credit standing, employment, income, assets and/or tax returns.
Even as a preapproval letter empowers a buyer to move toward a home purchase, it doesn’t limit the buyer’s lending options. Buyers don’t have any obligation to obtain a loan from a lender with whom they have had a conversation, shared financial documents or received a preapproval letter.
Length of time Could take up to 10 days Can be almost immediate Qualification Financial information and documents have to be verified Based on the little info you share Credit check Requires hard credit check and employment verification Only involves a soft credit check Result Serves as an offer of what the lender will let you borrow Gives an estimate of what you could borrow See More See LessMortgage preapproval lets you receive a personalized floating rate for your desired loan amount and term as the lender has verified your income and assets. A floating rate can rise and fall with the current market.
A mortgage preapproval is not a guarantee to receive a home loan. You’ll still need to apply for a mortgage with the lender before you receive any funding.
When you apply for a mortgage, you’ll need to provide similar documentation along with the purchase agreement for your new house. Mortgage approval also requires a home appraisal to determine the loan-to-value (LTV) ratio.
For almost any potential home buyer, the preapproval process offers substantial benefits. From a transaction standpoint, a lender’s support can strengthen any purchase offer that the buyer submits. And, for a buyer’s personal finances, the steps involved in preapproval can help a buyer to better grasp the implications of various payment amounts—both up front and on an ongoing monthly basis.
These preapproval benefits, however, come with some important conditions that buyers will want to note. The personal financial circumstances that form the basis for a lender’s willingness to extend a mortgage to a buyer can change over time. As a result, mortgage preapprovals will expire after a certain time period, such as 90 days.
If the buyer hasn’t gone under contract at that point, a lender will need to run through the preapproval checklist again, using updated financial data as necessary. For these reasons, the preapproval doesn’t guarantee a loan or any particular terms. The mortgage that the lender ultimately extends will depend on the exact conditions at the time the buyer needs the funds.
Keep your personal finances as static as possible as you move closer to a purchase. Changing jobs, opening new accounts or lines of credit or moving around significant amounts of money can create confusion and uncertainty about your financial standing and cause a lender to deny your application.
Anxiety or a lack of information should not discourage potential buyers from starting the mortgage preapproval process.
“I wish people wouldn’t be so afraid to have their credit checked,” says Jordan. “Your credit score won’t plummet as a result. It’s far more valuable to find out in advance whether your credit is good or needs work. You don’t want to find yourself saying, ‘I wish I had started this process four months ago.’” In fact, FICO, the credit scoring service, won’t penalize buyers for multiple lender credit checks within a short time frame.
Most mortgage preapproval letters expire after 90 days. After that, you’ll need to reapply and go through the verification process again. Lenders have an expiration date to help ensure no significant changes occur to your income, debts or credit.
For all the assurances that a mortgage preapproval letter creates, only a loan commitment letter signals final mortgage approval. When a seller accepts an offer on their house, the buyer will complete at least one full mortgage loan application. The terms, including fees and other costs, may differ in the estimate documents that the buyer receives from the lender.
Even at this late stage in the home buying process, shopping around and comparing offers still has significant value. The buyer then will select their preferred lender and schedule a property appraisal. Once the lender finishes the underwriting process, they can issue the loan commitment letter.
Katerina Matsa ultimately closed on her first home purchase in late 2018. Looking back, she only now appreciates the critical financial role that her lender played in the home buying process.
“If I could go through the preapproval process again, I would have more thorough conversations with the lender about our mortgage options. I would ask more questions and make sure I fully understand various details. Everything happened so fast. That was the downside of starting the process so late.”
Forbes Advisor Mortgages Writer Josh Patoka contributed to this article.
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