When you are ready to make an offer on a house, the home seller will want to know whether you are pre-approved for a loan. Why? They want to have confidence in the fact that if they accept your offer, you are able to follow through and actually purchase the home. Without a pre-approval letter, the home seller may choose to not accept your offer or to go with another offer that DOES have a pre-approval letter.
Why do you need a pre-approval letter?
First off, you will know in advance what type and size of home loan your are approved for prior to searching for and making an offer on a home. That can help you narrow down your home search to the price range you are approved for.
You can also get pre-approval letters from multiple lenders. Remember, a pre-approval letter is not a commitment from a lender to provide you a loan, nor is it a commitment from you to get a loan with that particular lender. Even after getting pre-approved, you can shop around for loans to find the best rates. You can use the pre-approval process to shop for loans and find the best rates and service. And don’t worry about multiple credit pulls damaging your credit score. Within a two week period, all mortgage inquiries only count as a single pull.
Second, you will be able to move fast on your offer. Pre-approval letters are good for a period of time, usually 60-90 days. Getting pre-approved means you can make an offer quickly when you find the perfect home, and not have to wait a couple of days to get a pre-approval letter from your lender.
Third, a pre-approval letter signals to everyone else, including real estate agents, insurance companies, title companies and most importantly, the seller of the home you want to purchase, that you are serious. In a competitive multiple-offer real estate market, this is particularly important.
How do you get started? Talk to your bank or lender. I can give you names of several local central Oklahoma lenders I have worked with for many years. I don’t receive anything for referring you to a lender – in fact it is prohibited by federal law. I just know from past experience which lenders are easy to work with and can do what they say they will do in a timely basis.
When should you get pre-approved?
Often people feel they don’t need deal with mortgage company until they find a home they want to purchase. In fact, it is much, much better for you to talk to a lender first before you start your home search. They can provide guidance on what type of loan you qualify for, and even help you improve your credit to save money. Most importantly, they can run your credit and verify that – on the surface at least – you can qualify for a loan and the amount of loan you can qualify for. They can write this into a “pre-approval letter” that we can then provide to the buyer upon making an offer on a home.
Does a pre-approval letter guarantee I will get a loan?
A pre-approval is NOT a guarantee that you will get a home loan. The lender may – and most likely will – want additional documentation to prove that what you stated on your application is in fact correct. The lender will also need to do an appraisal of the home you plan to purchase to make sure they feel the home is valued at or above the amount they plan to lend on the home.
What you will need to get pre-approved for a home loan:
To get pre-approved with most lenders you will likely need the following documentation:
- Your W-2 from the past two years.
- Your pay stubs for the past three months.
- Your tax returns from the past two years.
- Your checking or savings bank statements for the past three months (this will likely show your down payment funds as well).
- Statements for all your other assets (stocks, bonds, retirement accounts) for the last two months.
- The name and phone number of your landlord (if you are renting) or your current mortgage documents.
- Your divorce decree, if applicable.
- If you are self-employed: Your business tax returns for the past two years in addition to your year-to-date profit-and-loss statement and year-to-date balance sheet.
- Your Social Security number and permission to pull a credit report.
If may not need all of the above documentation, especially if you have a stellar credit record. Each lender will have their own pre-approval requirements.
Do I need a pre-approval letter if I have the cash to purchase a home?
If you are financially able to purchase a home with cash and don’t need a loan, great for you! It will be easy to close on your new home. You won’t need a pre-approval letter regarding a loan. But seller’s still will want to know that you actually have the resources to proceed and close on the home before they accept your offer. This can take the form of a letter from your bank stating you have the funds available to purchase a home.
What if I can’t get pre-approved?
Work to improve your credit score. Pay down your debt and make sure and pay your bills on time. Make sure there are no errors on your credit report. You can normally work with your lender to provide you guidance. They are happy to explain why you were unable to qualify and often will give you suggestions on improving your credit rating and a time frame to come back and talk to them. I have seen buyers who were unable to get approval work hard and six months later able to qualify for a home loan. You can do it!