February 14th, 2017 5:41 AM by Jackie A. Graves, President
homebuying process can be a long one, with many things that need to be done
along the way. And while it's not mandatory, obtaining a mortgage pre-approval
can make your experience much smoother. Here's what a mortgage pre-approval is,
why it's important, and how to tell the difference between a pre-approval and
A mortgage pre-approval is essentially the same thing as
applying for a mortgage, just without a specific home in mind. You go to a
lender, fill out their application, and probably pay an application fee.
The lender then runs a credit check, requests documentation
about your income, assets, and employment history, and verifies all your
information. They will then pre-approve you for a certain maximum loan amount,
which is generally good for a specific amount of time (90 days seems to be
common). You'll receive a pre-approval letter, which represents a firm
commitment to lend you that amount of money for your home purchase.
There are a few key benefits of a mortgage pre-approval, and I
strongly suggest that no prospective homebuyer start the process without one.
For starters, a mortgage pre-approval makes a submitted offer
much stronger. You're essentially telling the seller "Hey -- I'm a serious
buyer and actually have the ability to buy this home." (Be aware that the
lender can give you a pre-approval letter with a lower dollar amount, so the
sellers won't know your maximum budget.)
addition, you'll know exactly how
much house you can afford, so you can plan your home search accordingly. This
way, there are no surprises when you fall in love with a particular home and
then apply for financing, only to discover you can't afford it.
Also, you may be able to lock in a certain interest rate when
you get pre-approved. When interest rates are expected to rise (like they are
over the next few years), this could potentially be a big benefit.
Finally, a pre-approval lets you know where your credit stands
while there's still time to do a little damage control. It can take years to
have a big impact on your credit score, but it's certainly possible to boost
your score by a few points in a few months. As you can see in the chart below,
an increase of a few points can make a big difference in the amount you'll pay
over the term of your mortgage:
FICO Score Range
30-Year Mortgage APR
Total Interest on $200,000 Loan
Data Source: myFICO.com.
need some tips to boost your credit score, check out this articleOpens a New Window.. It's also worth noting
that mortgage lenders typically use the middle of your FICO scores from the
three major credit bureaus. So, if you have a 694, 698, and 702, your loan will
be based on the 698. Therefore, it may be worth your while to subscribe to a
credit monitoring service like myFICO.comOpens a New Window. that tracks all three scores.
be fooled -- a mortgage pre-qualification is not the same thing as a
pre-approval. Not even close. A pre-qualification is an informal process where
you provide a lender information about your debts, income, and employment
situation, and they tell you how much of a mortgage you should qualify for. It is not a firm
commitment to lend, and therefore does not carry as much weight with sellers. A
pre-approval is the home buying tool that you want in your pocket as you begin
the shopping process, so be sure you're getting the real thing.
By Matthew Frankel - To
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