First Time Home Buyers Guide: What about Pre-Qualification, Pre-Approval, and Mortgage Commitment Letters?
November 11, 2019
Securing pre-qualification, pre-approval, and mortgage commitment letters can simplify the mortgage application process. These steps can also help home buyers avoid disaster. They don't need all three, however.
Mortgage Pre-Qualification and Buying a House
Future home buyers can get pre-qualified for a home mortgage long before they ever start house shopping. Used mostly by buyers to gather information and ask questions, this process is quite informal. Applicants have a consultation with a mortgage lender. He or she will ask a range of questions about debt, finances, the type of home the applicant would like to have, and the requirements for various loans.
Using this information, the mortgage lender will then provide the applicant with a range of information. First, the lender will discuss any details in the applicant's financial profile that may cause issues with the approval process. He'll also discuss mortgage types, their requirements, and what borrowers need to be approved. This gives people looking to buy a home time to fix any credit problems, ensure they have the down payment, and that they make enough money. It also gives applicants an idea of what size of a mortgage they could get, and therefore, what kind of houses to look at.
Mortgage pre-qualification has no real value outside of acting as a starting point. The lender doesn't verify any financial information, run any checks, or give binding mortgage estimates. Therefore, it's unwise to use mortgage pre-qualification as a negotiation tool when buying a home. For that, consider getting pre-approved.
Mortgage Pre-Approval and Home Buying
Being pre-approved for a home loan is like the middle ground between pre-qualifying and submitting a mortgage application. During this process, the mortgage lender will review and verify an applicant's financial information to determine their creditability. This can take some time, but it costs nothing. And once someone has been pre-approved, they can demonstrate to the seller and real estate agents that they're serious about negotiations. It can also speed up the mortgage approval process, which can be a huge benefit in a hot housing market.
To be pre-approved for mortgages, applicants will need copies of their credit reports and give the lender permission to do a hard tri-merge check, which pulls reports from the three main credit bureaus. The lender will also need a few month's of bank statements and pay stubs, tax returns, any sort of asset verification, and proof of any other forms of qualifying income.
When the underwriter returns the application, they will say that it has been approved, approved with conditions, suspended, or denied. If it has been approved or denied, this part of the process is over. The borrower can move to the next step, try another lender, or fix their financial issues. If the application was suspended, it means the underwriter requires more documentation or information before making a decision. Approval with conditions means the applicant will need to satisfy some concerns or requirements before the mortgage can proceed.
At this point, borrowers should discuss locking in the interest rate and loan terms. How long the lock lasts and what it costs will depend on the lender and the mortgage. However, they will protect the buyer from rising interest rates or term changes between pre-approval and the date the mortgage closes.
Mortgage Commitment Letter
To provide a borrower with proof of approval, underwriters can complete a commitment letter. It will include the mortgage type, amounts, and other details. Real estate agents and sellers see this as proof that a buyer is serious and financially able to negotiate for a specific. The property sale can go forward as soon as the seller approves the offer. This puts the ball in the seller's court, so to speak.
Warnings about Pre-Approvals
Borrowers should get pre-approval before choosing a house to buy. Pre-approval and approval both take time. It would also be heartbreaking to fall in love with a property that falls outside the budget. Or, for someone to settle for a home that's well below their approved limit.
Mortgage commitment letters and pre-approval letters are not the same. Applicants can still be denied after receiving a pre-approval letter for a number of reasons. A recent job change, a negative item appearing on a credit report, incurring new debt, or a change in requirements on the lender's side can all cause a denial after pre-approval.
Pre-qualification, pre-approval, and commitment letters all have different procedures and purposes. It's best for anyone wanting to buy a home to understand how these three options work and which one they'll need. They should also apply early and lock in the terms and interest rate as soon as possible. Then, they just have to focus on finding the perfect house and putting in an offer.