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Understanding Mortgages: What is Pre-Approval?

by Amy Lillard

(7/17/2012) In the midst of one of the most uncertain real estate markets in history, it’s more important than ever to be informed. In a continuing series, we take a look at some of the most pressing questions about mortgages, refinancing, home equity, and other real estate options available to you.

In what is largely unsurprising news to most, nearly 9 out of 10 buyers use a loan to purchase their homes, according to the National Association of Realtors.

But since the real estate market has been volatile in the last few years, in a large part because of financing that was not appropriate for certain borrowers, lenders are understandably jumpy about extending certain loans. And sellers want to ensure that the people that buy are good for it.

All of this points to the benefit of getting pre-approved for a home loan. Pre-approval simply means that you have met with a mortgage broker or loan officer, gone through a credit check and informational review, and have been identified as a good candidate for a home loan. A formal pre-approval letter serves to document this process.

Pre-approval helps narrow the field during the home search process. The letter will specify exactly how much the upper limit of your mortgage can be according to your individual finances. This helps hone in on appropriate properties, and keep you spending within your means.

When potential buyers view properties with a pre-approval letter in hand, it also helps demonstrates your financial strength and ability to complete a purchase to lenders and sellers. Offers are taken more seriously. It provides all involved with confidence that any offers put down won’t fall through, and that any loans taken out are more likely to be paid.

Pre-approval can be obtained from lenders in person or online. In addition to getting a pre-approval letter for use in home viewing, the pre-approval process can also get you started on finding the best loan for your situation. After determining your buying and selling history, credit, employment, income, investments, and other financial information, loan officers can recommend traditional loans, adjustable-rate mortgages, or a number of state or federal programs.

Important to remember about pre-approvals is their time windows. Most will apply up for between 30 and 90 days. After that point, another pre-approval may be necessary if a property has not been found.

For Additional Reading:

7 Tips for Getting a Pre-Approved Mortgage: http://www.smartmoney.com/spend/real-estate/7-tips-for-getting-a-preapproved-mortgage/

Don’t Forget Your Pre-Approval Letter:
http://www.realtor.com/basics/buy/looking/preapp.asp?source=web

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