Pre-Approval
Pre-qualification vs Pre-Approval.
Getting pre-approved can help you write a strong offer on a property and give you the edge if there’s a bidding war. A pre-qualification is a good first step if you aren’t sure what you can afford or where to start.
We’ll walk you through both processes, helping you understand your options, what you can afford, or what might need changing to get you a better rate or terms.
What is a Pre-Qualification?
A pre-qualification is a letter of approval stating you meet basic financial criteria, based most often on the borrower’s word. It’s one of the first steps any buyer should make in their homebuying journey.
This process is when you have a verbal discussion with your lender about your income, assets, liabilities, and estimated credit score. It is not a commitment to lend.
Why consider getting pre-qualified?
Getting pre-qualified helps you understand what loan options you have and gives you time to think about which option suits you best.
For example, do you want a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM)? Would you prefer a 15-year or 30-year term loan? How much money must you put down on the home to qualify?
Knowing all the facts can help you move forward in the right direction when you’re ready to look at homes.
When should you get pre-qualified?
Consider getting prequalified when you’re thinking about buying a home. This could be 6 months before you even look at homes.
Here’s why it’s a good idea.
You’ll know what you might need to improve/change to get the loan you need. For example, if you don’t have a large enough down payment, you’ll have time to save more. If your credit score is too low, you can improve it before you’re ready to buy a home.
What Information is required for a pre-qualification?
To get pre-qualified, you can verbally provide the following information:
- Your total monthly income from all sources.
- The total liquid assets (checking, savings, CDs, stocks, or bonds).
- The amount you’ll put down on the home.
- How much you potentially want to borrow.
What is a Pre-Approval?
A pre-approval is the closest you can get to a final approval without an executed purchase contract.
To get pre-approved, you must provide your documentation to prove your income, assets, and liabilities. If you’re approved for a specific loan program, you’ll receive a pre-approval letter. This letter is more of an offer than a commitment. It states how much you can borrow, at what terms, and what conditions you must satisfy to get the final approval.
Why Consider Getting Pre-Approved?
A pre-approval is more attractive to a seller than a pre-qualification because it means the lender has done more due diligence to determine whether you are financially qualified for the loan.
A pre-approval letter also helps if there’s a bidding war. Los Angeles is a highly competitive real estate market. If you plan to finance a home purchase, a mortgage pre-approval from a lender is critical, especially when multiple buyers are competing for the same property. If there are two buyers – one with a pre-approval and one without, sellers often go with the buyer with the pre-approval even if the offer is a little lower.
When should you get Pre-Approved?
Pre-approval letters are good for 60 – 90 days. If you don’t find a home before the offer expires, you can renew it by providing updated income and asset information. We’ll pull your credit again too, just to make sure nothing changed in that time.
What Information is Required for a Pre-Approval?
To get pre-approved, you must provide documentation to prove the information you stated when you were pre-qualified.
This may include:
- Identification
- Government issued ID for each borrower – this can be a state-issued driver’s license, birth certificate, or passport.
- Proof of Income
- Employees – Pay stubs covering your last 30 days of employment.
- Self-employed – profit and loss statement.
- Passive income – most recent financial asset statements.
- Financial Asset Statements – At least two months of your most recent statements, including:
- Bank checking and savings.
- Retirement Funds – 401k, pension, self-funded (ROTH, SEP, Individual), annuities.
- Tax Returns
- Employees – W-2 forms and tax returns for the last two years.
- Self Employed – Profit and loss statements, 1099, and tax returns for the last two years.
- Passive Income – Tax returns for the last two years.