Why is a mortgage pre-approval so important?
Obtaining a mortgage pre-approval is a crucial first step in the home-buying process, especially in Maryland’s competitive real estate market.
What is a Mortgage Pre-Approval?
A mortgage pre-approval is a formal evaluation by a lender to determine your eligibility for a home loan and the maximum amount you can borrow. It is also important to review your comfort level for a payment. Often what you can qualify for on paper is significantly higher or lower than your comfort level, a good lender can work with you to meet your comfort zone. The process involves a comprehensive review of your financial situation, including:
Credit Scores: Lenders assess your creditworthiness by reviewing your credit history and scores from all three major bureaus: Experian, Equifax, and TransUnion. Typically, the middle score is used for qualification purposes. They are also checking for derogatory credit accounts like bankruptcies, short sales, collections that could affect when you can buy or items that need to be addressed before a purchase. Your credit score will also help to identify which loan programs may be more suitable for you or even items that can help you to qualify for better terms on your mortgage.
Income and Employment History: Your income and job history are evaluated through documents such as pay stubs, W-2s, 1099s, and possibly tax returns to determine your qualifying income for the loan. Lenders will also review and document additional income from other sources like child support, alimony, retirement, or side jobs (as long as you claim the side job income on your taxes) for additional qualifying income, if needed.
Assets: Lenders examine your assets, including checking and savings accounts, money market funds, cryptocurrencies, and retirement accounts and gift funds to ensure you have sufficient funds for a down payment and closing costs.
Depending on your situation, lenders may also identify grant or loan programs that could assist you.
Why is Pre-Approval Important?
Determines Your Budget: A pre-approval clarifies how much house you can afford, allowing you to focus on properties within your price range and avoid the disappointment of considering homes beyond your means. It is not easy to fall in love with a home that is within your budget once you’ve seen homes that are well beyond your budget! Also, if you already own a home, a pre-approval will help you to determine if you need to sell or rent your current home first in order to qualify for the new home.
Enhances Seller Confidence: Sellers and real estate agents view pre-approved buyers as serious and financially capable, increasing the likelihood that your offer will be considered. Most realtors will not even begin the home search without a lender review and approval.
Assesses Creditworthiness: Lenders evaluate your credit score to determine eligibility and potential interest rates. While some borrowers worry about the impact of credit inquiries, the effect is typically minimal and outweighed by the benefits of pre-approval. You may be surprised to know that inquiries make up only 10% of the credit score.
Verifies Income: Reviewing your income and employment history helps confirm your ability to manage monthly mortgage payments and additional housing costs, such as condo fees or homeowner association dues. It also helps to confirm your comfort level for the payment. What looks good on paper may be much more than you are actually comfortable paying!
Evaluates Savings: Lenders verify that you have sufficient funds for a down payment and closing costs. Even with financing options that require lower upfront costs, having available funds is essential for initial expenses including earnest money deposit provided with the offer, home inspections and appraisal to name a few.
Identifies Potential Issues: The pre-approval process can uncover financial concerns that may hinder loan approval, allowing you to address them early. This proactive approach can prevent future complications and improve your chances of getting the loan.
Speeds Up the Buying Process: With pre-approval, the mortgage process becomes more efficient, enabling quicker offers and closings. Some lenders offer full credit approval by their underwriting team prior to submitting an offer. This can strengthen your offer and allowing for a faster closing, which can be advantageous to sellers.