Buying Step 3: Get Loan Preapproval
Few people can buy a home for cash. Most buyers, especially first-time purchasers, require a loan. Real estate financing is not just about getting a loan, it’s about getting the loan that's right for you. In other words, a mortgage with the lowest cost and best terms.
Get a Preapproved Mortgage
Start the mortgage process well before bidding on a home. REALTORS® can often recommend a mortgage source, or a mortgage broker who’ll shop around for you. There are many mortgage options and lenders so it pays to shop around. By meeting with lenders - either face to face or online - and researching loan options, you will find which programs best meet your needs and how much you can afford.
Preapprovals are also recommended for another reason: purchase forms often require buyers to apply for financing within a given time period. By meeting with loan officers in advance and identifying mortgage programs, it won't be necessary to quickly find a lender, do a check credit and rush into a financing decision that may not be the best option.
What is Preapproval?
"Preapproval" means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a preapproval letter, which shows your borrowing power. You can visit as many lenders as you like and get several preapprovals, but keep in mind that each one does a new credit check, and too many credit checks could adversely affect your credit rating.
Although it is not a final loan commitment, the preapproval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.
How Do You Get Preapproval?
Real estate financing is available from numerous sources, including mortgage brokers, mortgage companies, banks, online lenders and, in some cases, individual REALTORS® themselves. A REALTOR® may suggest one or more lenders that are known to offer competitive programs and deliver promised rates and terms.
To get preapproval you must complete a written application and provide supporting documentation, such as recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the prequalification procedure, a loan officer will describe the type of paperwork required.
A loan officer will carefully review your financial situation, including your credit report and other information, then suggest programs which most closely meet your needs
Doing your legwork and researching mortgages and lenders ahead of time, and getting a preapproved mortgage gives you a clear idea of what you can afford, tells sellers you are serious and means that you don’t have to rush the financing once you find a home that you want to buy.