Entering the housing market can feel intimidating. Buying a home is a huge investment, the market has been red hot for the past couple of years, and if it’s your first time buying a home, you have to learn a whole new set of terms. Mortgages, principals, due diligence, earnest money, pre-approval—the list goes on. While these are all words you should feel free to discuss with your realtor, it’s important to feel confident that you know exactly what you’re getting into when you begin the home buying process.
For most, buying a home means you need a loan from a bank. So typically, one of the first steps your realtor will ask you to take is to get pre-approval for your loan.
What is pre-approval?
Getting pre-approved for a loan means that you know how much money your lender is willing to give you, at which rate, and on what terms. Your lender will ask questions regarding your assets, how much money you make, and your credit score, and come up with an amount of money that they feel comfortable loaning you.
Getting pre-approved means that your lender has analyzed your assets and has pre-approved a loan amount for your home. It’s a way of finding out what kind of financing you are qualified for before you get your sights set on a home that is out of your budget. This is such an important step as you begin the house hunt. Oftentimes, we have no idea what price range of homes we should be looking at. Pre-approval gives you a hard and fast number to keep in mind as you start browsing.
Submitting Your Preliminary Application
Once you have found a lender, they will review your credit score, your income, and other factors and begin to explain the various kinds of loans you might qualify for. You will submit an application for a loan to begin this process. If it’s your first time buying a home, you might be eligible for a first-time homebuyer loan that comes with certain interest rates. But there are other kinds of loans available as well. In this stage, your lender will give you a lay of the land, explaining what kinds of loans they can offer you, how much of a loan you qualify for, and what kind of interest rates you might be able to get. Once you have pre-approval for a loan from your lender, you can begin to look for homes with the confidence that you are shopping in the right price range.
There is No Obligation
While pre-approval sounds very official, being pre-approved for a loan comes with no strings attached. Just because you are pre-approved doesn’t necessarily mean that you will actually borrow that money. You may decide not to buy a home, or your lender might tell you that you could take out a loan that is much higher than you feel comfortable borrowing. This stage is simply about gathering information about where you stand financially. Furthermore, if you find a better offer from another lender, you are free to take it!
Why Get Pre-Approval?
At the end of the day, getting pre-approval for a loan gives you confidence as you look at homes that you know you can afford and gives the seller confidence that if you go under contract, you will be able to actually pay for the home you have decided to buy. Pre-approval arms you with information, and everyone wins.
The Difference Between Pre-Approval and Pre-Qualification
With some lenders, you may hear the term “pre-qualification” being tossed around. Though some lenders don’t even distinguish between pre-qualification and pre-approval, generally pre-qualification is a more preliminary process, while pre-approval requires a more in-depth examination of your finances.
How to Get Pre-Approved
You’re ready to start looking for homes, how do you get pre-approved? To start, check your credit score, gather information about your current income and other loans you might be currently paying, and begin to contact lenders. Usually, it’s a good idea to compare offers from several lenders to find the best deal available. As you connect with different lenders and move toward pre-approval, you will navigate the process of finding the right lender, narrowing down your list until you have found the right loan for your future home.
Finding the Right Lender
But how do you “narrow your list down” when it comes to lenders? How do you even find lenders to start with? There are dozens of mortgage lenders available. Simply by googling “mortgage lenders” and reading reviews or asking around with family and friends which lenders they used, you will be able to find a number of options to get started.
Once you fill out some simple information about yourself and connect with a mortgage broker, you can begin to gather potential information about what kind of loan they will offer you. Repeat this process with a few different lenders to get a good idea of your options. Don’t feel like you need to jump at the first lender who might give you a loan—you aren’t obligated to take the loan if you get pre-approved. Finding a lender and mortgage broker is about finding the best loan for you and your needs. By comparing different offers from lenders you will learn about the different offerings available to you as well as find out who has the most competitive pricing.
So, now that you’re a pre-approval expert, you’re ready to enter the home buying process with confidence! Remember, loan pre-approval simply means that a lender reviews your financial picture to determine what kind of loan and how much of a loan you qualify for. Pre-approval is a great negotiating edge when you are shopping for a new home, giving you the certainty you can afford what you are looking for and giving the seller the confidence to accept your offer!