By Sonia Martinez, licensed real estate salesperson and top buyer agent in Queens NY.
So, after many months or even years of dreaming, you have finally come to the decision that you are ready to take the leap and now you want to go from being a renter to being a homeowner! Great! Smart decision!
Being a homeowner will always be a great decision, it is rewarding and will even put some money in your pocket when the right time comes to sell your property and move forward with new projects. But, not so fast… home ownership is the right decision IF you take the right steps and in order to take the right steps, you need to know how much of a house you can AFFORD.
Knowing that banks are offering great interest rates and the market is offering excellent mortgage programs is not enough. You need to be sure that you qualify for any of these “exceptional” programs and also that the interest rate is the right one for you, before you even start looking for a property.
So, what is the difference between mortgage pre-qualification and mortgage pre-approval?
Banks and mortgage brokers offer 2 different types of letters to prospective buyers. One is the pre-qualification letter and the other is the pre-approval letter. They sound similar but there is a great difference between the two of them.
The pre-qualification or “pre-qual” as we know it, is an informal review of your financial status. It is based on financial information that you give your lender regarding your income and the money that you have in the bank and they will give you a letter letting you know how much “theoretically” you can borrow, however, there is NO guarantee that you will get that mortgage loan. Your lender will ask you some questions regarding your financial life (income, savings, debt and credit), will not request documents, and based on your answers your lender will give you an estimate of how much you can borrow. If you want, your lender will give you a letter and then you can go out looking for a house.
The pre-qualification process may take 15-20 minutes and it is very easy. Just like anything that is too simple, in this case you will have a general idea of what the possibilities are of getting a mortgage loan, however, “general” is the key word. The mortgage pre-qualification is not a commitment to lend you money which means that you can find a house, submit an offer and have an accepted offer to find out that the mortgage company, after a formal review of all your financial documents and credit report is communicating you that they will not be able to give you the loan that you have discussed with them.
The pre-qualification process is quick and informal, the pre-approval process is detailed and it takes longer.
When you ask your mortgage lender to provide you with a pre-approval letter, you are basically asking that person to formally review your finances and to decide if you are able to fulfill the obligations of a mortgage loan. In order for the bank or mortgage broker to do that, you will be asked to provide a pile of paperwork to earn your pre-approval. Basically, you will need to put together a package for your lender including the following:
- Pay stubs showing your year-to-date income
- Two years of tax returns
- Two years of W-2 forms from your employer
- Bank statements of all your bank accounts (checking, savings) as well as investment accounts (CD’s, IRA’s, Pension, stocks and/or bonds)
- Information on any other real estate property you may own (if any)
- Rental history including rent payment receipts
In essence, the bank or mortgage company wants to determine if you will be able to repay the loan and if you will be able to make the monthly payments on time. Due to the extent of the review, this will take a few days but once it is finished you will have a mortgage pre-approval which is a commitment from the lender to provide you with home financing up to a certain amount. In other words, the official approval that you have the means and credit history to buy a home.
The pre-approval provides extra security to a seller and a clear indication that you are ready and able to purchase the house. While the pre-approval is much more complicated because you will need to provide all the paperwork in advance, just keep in mind that you will need to do that sooner or later anyway. Getting a head start on the mortgage loan process will allow you to shop with confidence for your new home, it is a smart decision and sellers will most likely prefer you as a buyer over someone without a pre-approval because there will be no risk that the deal might not go through.
Once you have your pre-approval letter in your hands you are ready to start looking for the property of your dreams. It is a green light from a lender that you are able to qualify for a home loan amount as long as certain conditions are met. The pre-approval also outlines the mortgage interest rate and the home-buying programs you could be eligible for depending on your specific situation. Mortgage pre-approvals are usually valid for 60 to 90 days. It is probably the most important step in your journey towards home ownership!
By: Sonia Martinez 4/25/2020