When you are purchasing a home, your broker may recommend you obtain a mortgage pre-approval before you find the home of your dreams.
There are some benefits to being pre-approved before you find a home, but oftentimes, people confuse pre-qualifications with pre-approvals.
So the question many buyers have is what exactly is a mortgage pre-approval?
In a nutshell, it's when the lender provides you (the buyer) with a letter stating that your mortgage will be granted up to a specific dollar amount.
What Do I Need For Pre-Approval?
In order to obtain a pre-approval for your home purchase, you will have to provide your lender all of the same information you would need to show for qualifying for a mortgage.
This means providing tax returns, bank statements and other documents that prove your net worth, how much you have saved for your down payment and your current obligations.
What Conditions Are Attached To A Pre-Approval?
Generally speaking, a pre-approval does have some caveats attached to it. Typically, you can expect to see some of the following clauses in a pre-approval letter:
- Interest Rate Changes - a pre-approval is done based on current interest rates. When rates increase, your borrowing power may decrease.
- Property Passes Inspection - your lender will require the property you ultimately purchase to come in with a proper appraisal and meet all inspection requirements.
- Credit Check Requirements - regardless of whether it's been a week or six months since you were pre-approved, your lender will require a new credit report. Changes in your credit report could negate the pre-approval.
- Changes In Jobs/Assets - after a pre-approval is received, a change in your employment status or any assets may result in the pre-approval becoming worthless.
Getting pre-approved for a home mortgage may allow you more negotiation power with sellers and may help streamline the entire loan process.
It is important however to keep in mind there are still things that may have a negative impact on actually getting the loan.
It is important to make sure you keep in contact with the lender, especially if interest rates increase or your employment status changes after you are pre-approved.