Pre-Approval Related to loans

You may have heard the term “pre-approval” before, but what does it actually mean? Pre-approval is related to loans and refers to the process of determining how much money a potential borrower can borrow. Lenders use various factors to assess a borrower’s ability to repay a loan, including credit history, employment history, and income.

If you’re thinking of applying for a loan, it’s important to understand the pre-approval process.

What is pre-approval?

Pre-approval is an indication from a lender that you may be eligible for a loan up to a certain amount, based on your financial history. Note that pre-approval is not the same as approval, which is the formal loan offer. A pre-approval is based on a review of your financial information, including your debt-to-income ratio (DTI) and credit score. Lenders typically require DTI ratios of 43% or less and credit scores of 660 or higher for pre-approval. Some lenders may require even higher DTI ratios and credit scores for certain loan programs.

How does pre-approval work?

Pre-approval means that a lender has looked at your finances – including your income, debts, and assets – and determined how much money you can borrow. This can give you a big advantage when you go to buy a house because you’ll know exactly how much you can afford to spend.

In order to get pre-approved, a lender will do a thorough analysis of your financial history. As stated before, they’ll look at your employment history, current debt, credit score, and any other factors that could affect your ability to repay a loan. Based on this information, the lender will give you a pre-approval letter that shows how much money you’re eligible to borrow.

It’s important to remember that pre-approval is not the same as final approval; your loan is not guaranteed until you go through the full underwriting process. During this process, the lender will verify all of the information in your application and make sure you are still eligible for a loan. However, having a pre-approval letter before you start shopping for homes can give you an advantage over buyers who don’t have one.

What are the benefits of pre-approval?

With a pre-approval, you can make an offer on a home with confidence because your financing has already been secured. A pre-approval usually lasts 60 to 90 days, therefore it’s important to begin shopping for your home within that timeframe.

What are the drawbacks of pre-approval?

A pre-approval letter is not an offer to lend, a commitment to make a loan, or a guarantee of specific terms. It is is not binding on the lender in any way. If you apply for a mortgage after getting pre-approved and your financial picture changes, the lender may rescind their pre-approval.

Getting pre-approved for a loan gives you some protection against being lowballed by a lender later on. But remember that even when using a loan officer at the same bank where you have deposits, this is still just a starting point in the mortgage search.

If you’re shopping around with multiple lenders, having multiple pre-approvals can help you get the best deal on your mortgage. But be aware that each time you allow a lender to check your credit report in connection with your loan application, it will result in a hard inquiry on your report—which can temporarily lower your credit score.

How to get pre-approved for a loan

  1. Talk to a loan officer at a bank or credit union. Find out what kinds of loans the officer recommends for your situation.
  2. Get a copy of your credit report. This will give you an idea of your credit history and might help the loan officer determine which type of loan you should get.
  3. Be prepared to answer questions about your employment history, income, debts, and assets. The loan officer will use this information to determine if you are a good candidate for a loan and, if so, how much money you can borrow.
  4. Once you have been pre-approved for a loan, you will need to provide documentation verifying the information you provided to the loan officer. This documentation may include pay stubs, tax returns, and bank statements.

What to do after you’re pre-approved

Assuming you have a stellar credit history and have been pre-approved for the maximum amount, you may be wondering what to do next. Here are some things to keep in mind:

  1. Don’t blow your entire budget on your home – just because you’re approved for a certain loan amount doesn’t mean you should spend every last penny. Keep in mind that you’ll need money for things like closing costs, furniture, and unexpected repairs.
  2. Get a fixed-rate loan – although adjustable-rate loans may start out with lower interest rates, they can go up over time. If you get a fixed-rate loan, your interest rate will stay the same for the life of the loan.
  3. Don’t apply for any new credit cards – now is not the time to open up a new line of credit. Every time you apply for a new credit card (or loan), your credit score takes a little dip.

How long does pre-approval last?

A pre-approval letter is typically valid for 60 to 90 days. This is a pretty broad time frame, which gives you more flexibility when it comes to finding a home and starting the mortgage application process.

What can change after pre-approval?

Unfortunately, in the mortgage industry, things can change constantly until you actually close on your loan and get the keys to your new home. Here are a few examples of what can happen after you’ve been pre-approved:

Your employment situation could change.
If you’re self-employed, the underwriter may ask for additional documentation to verify your income.
You could switch jobs. If you do, your loan officer will need to obtain a new Statement of Employment originally signed by your employer and dated within 60 days of the loan closing date.
Your credit score could drop.
If it does and is below the minimum credit score required by the program guidelines, you may no longer qualify for the loan. However, if the difference is marginal, your loan officer may be able to work with the underwriter to get a waiver.

Your debt-to-income ratio (DTI) could increase.
If you rack up more debt between getting pre-approved and applying for the mortgage—say, you apply for a bunch of new credit cards or take out a car loan—that could increase your DTI ratio and potentially disqualify you from getting a mortgage altogether. Any sudden increase in DTI is cause for concern among lenders since it means you’re less capable of repaying the money you borrow.
The housing market could change—for better or worse.
If home prices in your area skyrocket after you get pre-approved, that could mean good news for your home equity—but it also might make qualifying for a mortgage more difficult if lenders consider you “house poor.” On the other hand, if prices drop or interest rates rise, that could make it harder to buy the home you want within your budget

What if you’re not pre-approved?

If you’re not pre-approved, it may be because the lender wasn’t able to verify your information or documentation. This could be because you have yet to establish a credit history, or because the information you provided was inaccurate. In either case, you’ll need to provide additional documentation or information before the lender can process your application.

FAQs about pre-approval

What is a pre-approval?
A pre-approval is when a potential mortgage lender looks at your finances – including your debt, income, assets, and employment history – and conditionally approves you for a loan up to a certain amount. This tells you how much you can afford to borrow and sets a maximum price on your new home.

Why do I need one?
A pre-approval letter gives you an advantage in the home-buying process because it shows sellers that you’re already approved for financing. This means they’re more likely to accept an offer from you than one from someone who doesn’t have this information.

How long is it good for?
Typically, a pre-approval letter is valid for 60 to 90 days. During this time, you can continue working on improving your credit score and saving for a down payment. Once you find a home that meets your budget and passes inspection, you can then move forward with applying for the loan.

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