What to know about the pre-approval process
The first stop of your home buying journey should be in a lender’s office, not in an open house. There are a number of benefits to getting a letter of preapproval before searching for your dream home; the preapproval process is an important first step in your home buying journey.
What is the difference between prequalification and preapproval?
While preapproval and prequalification seem like interchangeable terms, they actually refer to different things. Prequalification is a ballpark figure of how much a lender will loan you based on your income, assets, debts, and estimated down payment; because prequalification does not include a credit check, it can often be done over the phone or online.
Preapproval is more involved; most lenders require an appointment with a loan officer before preapproval is given. The preapproval process will include a credit check and will require you to bring copies of a number of financial documents.
What do I need to bring to my appointment?
Most lenders will require you to bring several documents to your preapproval appointment, including:
- Drivers license or other state-issued ID
- Recent bank statements, including checking, savings, and other accounts
- Recent pay stub from your job
- Recent tax return or W-2
- Proof of IRAs, retirement accounts, stocks, or other mutual funds
- Application fee (varies by lender)
If the lender is prepared to offer you a mortgage they will give you a letter of preapproval including a Good Faith Estimate, or GFE. This brief document will specify the terms of the loan you are being offered including loan type, interest rate, and closing costs.
Should I get preapproved by more than one lender?
Most of us shop around at a number of different stores before making a major purchase – and a mortgage should be no different! While the preapproval process may be time consuming, it is a necessary part of comparison-shopping between lenders. As little as a tenth of a percent can make a major difference in interest fees over the life of a loan. A $100,000 30-year loan at 4.3% will pay over $78,000 in interest; the same loan at 4.1% will pay less than $74,000.
Shopping around can also help you negotiate for better interest rates or reduced closing costs. While preapproval does not guarantee that you will be offered a mortgage, it is an important first step in the homebuying process.