Loan Pre-Approval
By Steve Gillman - 2006
Loan pre-approval is one of the ways you can buy a house for
less. This is because you are a "sure thing" to a seller
if you are pre-approved for a loan, so your offer - even if it
is a little lower than another - is taken more seriously. What
else do you need to know about the pre-approval process? Here
are some pointers.
Loan Pre-Qualification Is not Pre-Approval
When you are pre-qualified to borrow a certain amount, this
is simply a quick measure of what you probably can borrow. It
is based on a few answers you give to things like how much income
you have and the amounts of any debts you have. It does not,
however, mean that the bank or lender who pre-qualifies you has
agreed to loan you anything. Your income still needs to be verified,
and your credit report will need to be looked at.
Loan pre-approval is this next step. Once the lender has verified
any important facts and seen your credit score, you can be approved
for a loan up to a certain amount. You should get a letter showing
what they will lend you and at what interest rate.
This still does not guarantee you a loan. If interest rates
change much prior to your offer on a home, the lender may lower
the amount they are willing to loan to you, since the total payment
amount is important to whether you can afford the loan or not,
and higher interest rates could raise this.Also, changes in your
credit score could affect the final loan commitment. Keep this
in mind, and make all offers subject to an actual loan commitment.
Make a few copies of your loan pre-approval letter. Presenting
it with an offer on a home is a good way to show the seller that
you are serious, and prepared to close. If the seller has ever
had an offer fall apart due to a buyer who couldn't borrow enough,
he will be very happy to see yours. If you are looking for more
than six months, you may want to get a new pre-approval letter,
to show that you are still able to buy at the current interest
rates and with your current credit score.
The Loan Pre-Approval Process
You can start by going to almost any bank, credit union or
mortgage loan broker. These can even be online if you want to
save yourself some driving around. Be sure that they offer pre-approval,
and not just pre-qualification. Ask about any fees. Some may
be free, but many will at least charge for running your credit
report. Find one that charges only if they approve you for a
loan.
Tell the truth on any forms you have to fill out. A loan from
your parents for a down payment may disqualify you, and the lender
may check and discover that the money has only been in your account
for a few weeks. It is better to know up front whether you qualify
or not than to get disqualified after you find your dream home.
Note: Your parents "gift" of money for a down payment
may be okay - if you have a letter stating that it is a gift.
If you have other ways to get a down payment together, your parents
might help you more by helping you pay down credit card balances
or other debts. This will increase the total amount a bank is
willing to loan you.
Ask the lender how long it will take to get the letter. You
may want to get more than one, especially if you find another
lender who will do this for free. When you get the letter, make
sure it states exactly how much the lender will loan you, and
when the letter expires. This will typically be in 30 or 60 days.
You can still show an expired letter to a seller, so he can see
that you are able to borrow enough, but it is better to have
a pre-approval that is current.
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