Pre-approval: The Paperwork Before the Paperwork
You’re thinking of buying a house. You find an interesting listing, send me an email that says “This looks perfect! It’s got 4 beds and 2 baths and it’s $450,000. Can we go take a look?”
Whoa nelly. It does look perfect…but you have no idea what you can afford! That’s where the pre-approval comes into play. “A pre-approval? My mom says I’m a catch.” Not quite what I mean…
What is a pre-approval?
A pre-approval is a process/document that states how much money you’re able to borrow for a loan and the price of houses you can afford. How does the lender figure this out?
They usually ask for the following documents (though others could be included occasionally):
Social security numbers of those purchasing the house
List of employers
Proof of income
Information about your current residence
You often need to have show some consistent income to prove you can pay the mortgage. Generally the lowest credit score you should have is around 580 to purchase a home. (It can be done with a lower score, but it’s not easy).
Won’t a pre-approval pull my credit and affect my score??
It will but generally a pre-approval credit pull only affects your score about 2-4 points. This is fairly insignificant if you have very good to excellent credit. You could gain that back in a short time. Also, if you were to get 4 different pre-approvals within the same month, it would only count as 1 pull not 4 separate pulls (so don’t worry about your score dropping 15+ points). If you have no idea what your score is, you can actually go to credit karma or credit sesame; it’s free and they’ll give you an estimate of your score (may not be exact, but gives you a good sense). If you do that first and see your credit score is 520, you may not want to bother yet with a pre-approval.
Once the lender has collected all the necessary information, they will usually send you a document that states the amount of money you’re pre-approved for (including the amount you’re able to put down). The amount they give you is a guide. If you’re pre-approved for $400,000 it’s up to you if you’re comfortable spending that much money per month (remember to factor in mortgage, taxes, insurance, and PMI if you are not putting 20% down). If it seems high, looking at $300,000 homes might make more sense. What if you see an amazing home for $410,000? Try coming in lower, saving up a little more for a downpayment, negotiating closing costs, ask for a gift check from a relative, etc. Here’s an example of how the document may look
Looking at this document, this couple is able to afford a house for $266,000. They’re able to put $46,000 down. Under “pre-approval conditions,” you can see what they’ll have to submit once they actually put an offer on the property as well. (Some of these have already been submitted, but you’ll have to submit a purchase contract, appraisal, etc).
So once I’m pre-approved, I pick a house, and then I’m good to go, right?
Not quite. You have a PRE-approval. Terms and conditions can always change once you’ve actually put an offer on a house. Numbers are crunched more carefully, ratios are calculated, etc. Maybe the house needs a bunch of repairs, appraisal comes in too low, etc. The pre-approval is just showing what you SHOULD be able to afford, but always keep in mind, there can be conditions that can arise after you’ve actually made an offer. Did you forget about your car loan? Old dentist bill you forgot to pay? Those things can creep in out of nowhere so just be sure to submit everything to your loan officer as thoroughly as you can to get the most accurate pre-approval. Choose a reputable company as well!