Real estate is all anyone can talk about nowadays. Whether you are a first time home buyer or a seasoned real estate investor…everyone needs a mortgage pre-approval letter to start buying real estate.
What is a mortgage pre-approval letter?
A mortgage pre-approval letter is your ticket to start buying real estate. This is a letter from a lender showing that you are qualified to spend a certain amount on a real estate purchase. This letter will be (or should be) attached to any offer that you submit to purchase real estate. This letter lets a seller know that you are a qualified and serious buyer.
Sellers should always ask for a pre-approval letter. This letter should be presented with any offers to purchase….not a pre-qualified letter.
What is the difference between a pre-approval letter and a pre-qualified letter?
A LOT!!!
Let’s go over what each letter contains…and then we will discuss why it is so important to get this letter updated regularly.
Pre-Qualified Letter
A Pre-Qualified Letter is not the same as a Mortgage Pre-Approval Letter. A Pre-Qualified Letter is also known as a pre-qual letter.
First of all, this letter does not hold much value. Because none of the information is verified. A pre-qual letter is just a conversation between a potential buyer and a lender. A lender will “ask” the potential buyer how much their income is. They will “ask” them if they have any debt. A potential buyer will give the lender an estimated credit score.
Typical Pre-Qual Information :
- Income
- Estimated Credit Score
- Bank Account Info
- Amount of Down Payment Available
- No Tax Info
From there, a lender will give the potential buyer an estimate on how much they can spend and loan terms. Loan terms are interest rate and length of loan.
What did this not do? It did not verify anything.
This gives potential buyers an idea of what (if anything) they can buy. This is not the green light to go and look at property.
Feel free to browse the internet…but most sellers are going to want a qualified buyer to make offers on their house….aka buyers with a pre-approval letter.
So what does a pre-approval letter have?
Pre-Approval Letter
To get a Mortgage Pre-Approval Letter, a potential buyer will be filling out a mortgage application. If you are approved, then the lender will issue you a pre-approval letter.
Before we go over what’s in the letter, let’s talk about how to get this letter.
A typical mortgage application will ask for:
- Copies of pay stubs
- Authorization to pull credit score (yes this will slightly ding your credit)
- Copies of bank statements (proof of down payment)
- Copies of 2 years of tax returns
From all this information, a lender will be able to issue you a pre-approval letter (or denial) within a few days. Basically, you have started the mortgage process.
A Mortgage Pre-Approval letter will include:
- Name
- Lender Name
- Loan Amount
- Purchase Price (Maximum)
- Down Payment
- Interest Rate
- Terms
- Property Type
- Type of Loan
- Expiration Date
So, now let’s talk about a few of these items…
Expiration Date:
This is currently going to be the most important. Why is this so important in 2022? Because interest rates are rising..and quickly. When interest rates rise…so does your payment. Every time the rates go up, you lose buying power. You can’t afford as much.
Most pre-approval letters are good for 60-90 days. When your letter expires, be sure to go back to the lender and get an updated letter. Be sure to let them know if anything has changed with your income or debt.
Purchase Price:
This is the maximum amount you can spend on a home. Does this mean that you should spend that much? In my opinion…NO.
Start by looking at a houses that fit your needs, without maxing out your budget. This will save you money to spend in the future.
And believe me, owning a home has a lot more expenses than the mortgage. Common maintenance on a home can cost a lot depending on the size of the home and land. Take a look at this great article about home maintenance costs.
Type of Loan:
There are many different types of mortgage loans and reasons to choose them. Check out my post on types of mortgages. This article will help you decide which loan will fit your needs. Many factors go into this decision. A good mortgage lender will help you make the best decision.
Common Types of Mortgage Loans:
- Conventional Loans
- Jumbo Loans
- Government Loans (FHA, VA, USDA)
- Specialty Loans (Construction, Interest Only, Reverse)
Down Payment:
This is the amount that you intend to put towards the purchase price. This is usually a percentage of the purchase price. The magic number is 20% down. Why do you want to put down 20%?
If you put down 20%, you will avoid paying PMI. PMI stands for private mortgage insurance. Check out this post explaining everything you need to know about PMI.
Now that you have this letter, you are ready to start shopping. Be sure to check out my tips for buying a home in 2022.
Having been a realtor for 15 years, I recommend working with a realtor. If you aren’t sure about why you should work with a realtor, check out the reasons to hire a realtor.
Buying a home is not the time to go it alone. They are experts. Let them guide you from start to finish.
Comments
Pingback: Important Reasons to Hire a Realtor | 6 Important Reasons
Pingback: First-Time Home Buyer | First-Time Home Buyer Cheat Sheet