What is Pre-Approval? Breaking Down the Home Buying Process

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What is Pre-Approval? Breaking Down the Home Buying Process

There is a lot to learn about the steps you must take as you attempt to purchase a home. Here at ProWest Properties, it’s our goal to simplify that process as much as possible. Pre-approval is a step that is misunderstood by many. Let’s break it down so that working toward pre-approval on a home you love isn’t intimidating or confusing.

What is Pre-Approval?

Pre-approval is a conditional step on the way to becoming a homeowner. It is an evaluation conducted by a lender of a borrower to make sure you are ready to buy a home. Your lender will look for a couple of different things, including proof of assets, credit history and score, employment verification, and other types of documentation. Here’s more information on each:

  1. Proof of income - Typically, you will need to produce your W-2 statements for the past two years, recent pay stubs that show your current income, proof of any additional income, and tax returns for the past two years.

  2. Proof of assets - You need bank statements and investment account statements to prove that you can afford the down payment and closing costs. Your lender will also make sure that you have enough money to afford household costs while you buy your home.

  3. Good credit - Most lenders will require a 620  FICO score or higher to be approved for a conventional loan. To check your credit, they’re going to be working with a credit bureau to acquire the information. The borrower (you) will fill out and submit a credit application, and there may be a fee involved. Once the score comes back the lender will determine if your credit meets their qualifications.

  4. Employment verification - Lenders want to make sure you have stable employment. Self-employed homebuyers will be asked to provide additional information, including proof of income stability, location, and nature of the business, and the business’s long-term outlook. 

  5. Other documentation - Your lender will ask for other documentation, including your social security number, signature, and other documents. 

Pre-Approval is Not a Guarantee

One big moment of confusion for a lot of people is what, exactly, pre-approval does for them. While receiving pre-approval for the home you desire is a good sign, it is not a green light for the lender to give you the loan. But, pre-approval does have some perks. For example, it can give you confidence while you are searching for a home because it provides you with a proposed budget. Next, it puts you the fast-track to closing. Because your lender will have most of your information, a mortgage pre-approval accelerates the loan process once you make an offer. Finally, it establishes your credibility as a homebuyer. It proves that you have your finances in check and that you are serious about buying. It also proves that you probably won’t be denied when you decide to apply for a mortgage.

Pre-Approval vs. Pre-Qualification

These two terms often get confused, but they are in fact two different processes for the borrower. This great chart from Investopedia breaks down the difference:

As you can see, pre-approval is a more intricate process involving more data. We recommend getting both pre-approval AND pre-qualification, if possible, to put you in an optimal position with your lender. Having these in hand will give you the clearest possible picture of what you can afford.

Next Steps After Pre-Approval

Now that you are preapproved for a mortgage, you have a better gauge on what you can afford.  It’s perfectly fine to go house-hunting now; your pre-approval shows the seller you are serious in the most competitive of markets.

Let us help! Our comprehensive guide for homebuyers will keep you moving in the right direction. Looking to buy during the holiday season? Here are some additional tips.

The Down Payment Myth

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If you are thinking about buying your first home, two words may be keeping you up at night: down payment. According to a recent report by NerdWallet, 44% of Americans believe that they need a down payment of 20% or more to buy a home, and another 44% said that the lack of a down payment is keeping them from buying a home.

But are they correct? Do you need a 20% downpayment to purchase a home? The answer is a resounding no.

While 20% is the down payment needed to get a conventional mortgage and not pay any private mortgage insurance (PMI) it’s far from a hard-and-fast requirement for qualifying for a mortgage. In fact, there are many mortgage options that don’t require a 20% down payment, including:

  • Fannie Mae and Freddie Mac have 3% down payment programs available.

  • Federal Housing Administration (FHA) loan only requires a 3.5% down payment.

  • Veterans Affairs (VA) loan can be approved for 0% down.

  • USDA loans can also offer a 0% down payment option.

There are also private banks, online lenders, and even local governments that offer low or no down payment options.

And, if you have your heart set on a conventional mortgage, you can get approved for a loan with less than 20% down, but you’ll have to pay private mortgage insurance (PMI). PMI may cost between 0.5% and 1% of the entire mortgage loan amount and is paid directly to your lender. But before you get discouraged, remember that paying PMI isn’t always bad. Trying to avoid paying PMI may cost you more in the long run (for example, if your lender increases your interest rate in exchange for not paying PMI).

So don’t listen to well-meaning relatives and friends: you can buy a home without a 20% down payment. And if you are dreaming of a new home, search our list and get in touch.