Buying a new home or refinancing your existing mortgage involves a lot of paperwork. There are credit requirements to be satisfied, negotiations for the best deal, and finally, you should be able to understand the good faith estimate of the closing costs provided by the lender.
Home sellers generally prefer prequalified or preapproved buyers and a prequalified buyer will have leverage to negotiate with the seller. Most importantly, the prequalified buyer will know how much mortgage he or she can afford and will not spend time trying to purchase a home that he or she cannot afford.
To prequalify for a mortgage loan you will need to provide the details of your income, assets, credits, and debts to the lender. The lender will use these details to estimate the mortgage that you can afford. The information given to you will include the maximum amount of loan available, the loan terms, and the monthly installment payments that fit into your budget. Prequalification is not binding to the lender as the estimate is based on the information provided by you has not yet been verified.
Sellers are usually happy to deal with a pre-qualified buyer; they know that the prospective buyer has the means of putting together the money and is not wasting the seller’s time. The seller is able to count on the buyer to back up the offer provided.
Pre-approval is one step ahead of pre-qualification. When you apply for pre-approval loan, you provide information about your job, your income, credits, and debts. The lender, after receiving this information, contacts your employer to verify your employment details, your bank for the income, credits and debts, and other agencies to verify your assets. After completing the verification, the lender issues a letter to the prospective buyer stating the amount for which mortgage is approved and the duration for which the pre-approval offer is valid. The pre-approval process has a small fee attached which is generally refunded during closing.
There are twofold benefits for prospective home buyers to be preapproved. First, you will be more attractive as a buyer for the lenders as they will not be worried about your loan getting turned down after they accept your offer. Secondly, the closing time for the loan will be much shorter as the initial survey and paperwork towards you creditworthiness and your ability to pay the mortgage have already been worked out by the lender.
One thing that buyers should note is that in case your financial situation changes before closing, i.e. you lose your job, or your pay is reduced, you should contact the lender and make him or her aware of the situation as the pre-qualification and pre-approval will not be valid anymore.