When purchasing a home, one important step that homebuyers often overlook or delay is getting preapproved for a mortgage. Mortgage preapproval is a service provided by lenders that offers homebuyers a comprehensive understanding of their borrowing capacity, giving them an edge in the competitive real estate market. In this blog, we'll discuss the significance of a preapproval and why homebuyers should prioritize obtaining it early in the homebuying process.
What Does Mortgage Preapproval Mean?
The mortgage preapproval process involves mortgage lenders reviewing an applicant's financial and credit status before determining the most they can borrow. It involves a loan officer thoroughly reviewing your:
- Income (via recent pay stubs, W-2 forms and tax returns for the past two years. Self-employed borrowers may need to provide additional documentation, such as profit and loss statements or 1099 forms.)
- Assets (bank statements, investment account statements and other asset documentation)
- Monthly debt payments (via credit report and possibly documentation to verify specific debts or liabilities, like credit card statements, loan statements or student loan documentation)
- Credit score (via credit report)
- Credit history (via credit report)
Unlike a mortgage prequalification, which provides an estimate based on self-reported information, a preapproval entails a comprehensive verification process, making it a more reliable indicator of a buyer's purchasing power.
A preapproval also typically includes information about the types of mortgage loans you are approved for. Conventional loans usually mandate a minimum credit score of 620 or higher, whereas FHA loans may feature lower minimum credit score prerequisites.
Competitive Advantage
In a competitive market where numerous buyers are competing for the same property, possessing a preapproval letter shows sellers that the buyer is committed and financially equipped to finalize the transaction. This gives the buyer an advantage over other prospective buyers who have not yet obtained a preapproval or are solely reliant on prequalification.
Clear Budget Parameters
Obtaining a preapproval early in the homebuying process helps buyers establish clear budget parameters. By knowing the limit they are eligible for, buyers can focus on finding homes they can afford and avoid wasting time and effort on homes that exceed their financial capabilities. In short, it enables them to concentrate on properties that match their budget and preferences.
Opportunity for Improvement
A preapproval also offers buyers an opportunity to address any issues that may impact their home loan eligibility. If the preapproval process reveals credit issues or other financial challenges, buyers can take proactive steps to improve their financial standing before they start house hunting. This may involve working on their debt to income ratio, resolving credit discrepancies or saving for a larger down payment to qualify for better loan terms.
Negotiation Power
With a preapproval letter in hand, buyers can engage in negotiations with sellers from a position of authority, showcasing their commitment and capacity to obtain financing. Occasionally, sellers might lean towards accepting an offer from a preapproved buyer, particularly if they're eager to expedite the transaction.
Streamlined Closing Process
Since much of the groundwork has already been completed during preapproval, including income verification and credit checks, the mortgage application process can proceed more efficiently. This can help expedite the time it takes to reach the final loan approval and close on a home, reducing the risk of delays or complications.
Preapproval stands as a pivotal step in the homebuying journey, providing manifold advantages to prospective homebuyers. By obtaining a preapproval early, buyers can address any financial issues, gain a competitive advantage, establish clear budget parameters and strengthen their position during negotiations. Ultimately, a preapproval sets the stage for a smoother and more successful homebuying experience, making it a vital step that homebuyers should prioritize at the outset of their journey towards homeownership.
If you are thinking about buying a home soon, get preapproved with your local Premier Mortgage Resources loan officer today.
