Pre-Approval FAQs for First Time Homebuyers

 What is pre-approval?
It’s a document given by your home lender certifying that you are qualified for a certain loan amount. Loan type, interest rate and loan-to-value ratio are also included.

Why do I need to have a pre-approval?
You need it so you’ll know how much house you can afford. If you know your price range, you can focus on searching homes priced within your ability to pay. It will be a huge letdown if you start falling in love with a certain home, and then later on discover that you don’t qualify for a loan that can pay for the home.

Many home sellers also nowadays specifically instructs realtors to show their homes only to prospective home buyers with pre-approvals. They want to limit foot traffic only to people who are truly looking to buy. This is specially important for a home currently occupied, as current residents need to be away from the home for some time to give way to the showing.

In a sellers’ market, where there are fewer homes for sale than number of buyers, you can present your offer ahead of other buyers and you can make your offer stand out if you already have a pre-approval.

Getting a pre-approval also acts as your alert or reminder system. As you check the list of required documents, you’ll be able to realize some things about your finances that you have not been minding for a long while. Too much expense on eating out? You might discover recurring payments that should been stopped months before.

A not-so-obvious benefit of getting a pre-approval is your chance to correct your credit report much earlier in case there are errors in your credit report, or your chance to fix your credit in case your pre-approval application is denied.

Is pre-qualification different from pre-approval?
Yes, these two documents are different. A pre-approval is more valued by sellers and realtors than a pre-qualification.

A pre-qualification is just an estimate of how much home loan you can afford to borrow from your lender. It’s based on basic financial information (income, expenses, assets) that you tell the lender. It’s not a complete information because your credit history is not considered.

You can even get your pre-qualification online. Just go to the website of your lender, enter your income and expenses, and then submit your request.

When should I get a pre-approval?
Get a pre-approval only when you’re fairly sure you’ll be buying within the next 60 or 90 days. A pre-approval is only valid for 60 or 90 days.

Another thing is about your credit report. When you apply for a pre-approval, your lender will inquire about your credit history, and that inquiry will appear in your credit record, possibly affecting your credit report if there are too many credit inquiries.

So if you think you’ll not be buying within the next several months, get a pre-qualification instead. This will be enough to guide you focus on a certain price range as you search homes and communities.

What documents are required to get a pre-approval?
Lenders differ in the number of documents they require, but the most common documents required are the following:

• Pay stubs for previous 3 months
• W-2 forms for past 2 years
• Federal tax returns for past 2 years
• Bank statements for savings and checking for previous 2 months
• Asset statements for 401K, IRA, Stocks, Bonds, etc for past quarter
• Recent credit report
• Residence history for past 2 years
• If applicable, divorce decree and child support payment documents

How do I choose a lender? 
You can get references from your family and friends and your realtor, if you already have one.

If you’re planning to avail of a mortgage loan assistance or downpayment assistance program, choose from a list of lenders accredited by the assistance provider.

When you’re deciding on which one to choose, consider the following:

• Experience or specialization on the type of mortgage you prefer
• Interest rate
• Straightforward answer on closing costs
• Do they charge for pre-approval or loan application?

What should I do if my pre-approval application is denied?
The two main reasons an application is denied are poor credit rating and insufficient income. If it’s poor credit rating, examine your credit report and if you see an error, go to the credit reporting company’s website and present your correction request, following their dispute procedures.

If your credit rating is really poor, start fixing your credit. Pay your dues on time. Reduce your credit utilization rate.

If it’s your income that’s really the problem, wait for a salary increase, or find other sources of income. See if you can have a qualified co-borrower. You might also start looking at better job opportunities.

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