This post is part of our women homebuyer series
You’re smart to think ahead. The best approach to buying a home with few financial surprises is to learn how homes are financed, find out how and where to get financial assistance, and understand all the costs involved in addition to the cost of the house. Mortgage pre-approval is an important first step in your financial preparation.
Getting mortgage pre-approval means determining your financial situation and the amount you can afford for a home. This allows you to shop with confidence, focus on homes within your budget, and make a strong offer on the right property. For women, getting mortgage pre-approval also provides leverage in negotiations and shows sellers you’re serious. This can prevent discrimination and help you get a fair deal on the home you want.
What is mortgage pre-approval?
A pre-approval is an assessment done by a mortgage lender that tells you the amount you’ll be able to finance through a loan and what your monthly payment will be. While you can get a rough estimate through prequalification, taking the extra step to obtain pre-approval will give you some added advantages.
Pre-approval helps you:
- Understand your financial condition
- Know exactly how much home you can afford before you begin your home search
- Strengthen your purchasing power when making an offer
When you find a home you love and are ready to make an offer, your mortgage pre-approval lets the seller know that you’re serious and fully prepared to buy their home, putting you in a stronger position than other potential buyers. With an official pre-approval letter in hand, you can search for homes with the peace of mind that you have qualified for a mortgage before you even start house hunting.
Understanding the pre-approval process
To get pre-approved for a mortgage, you will typically need to go through the following steps:
Gather your financial documents
Gather and organize all of your important financial documents, such as recent pay stubs from your employer showing your income, copies of your tax returns for the previous few years, bank statements for any checking or savings accounts showing your balances and transactions, records of any investments like stocks or bonds including their current value, documents relating to loans or lines of credit showing the amounts owed and minimum payments due, insurance policies indicating coverage and premiums paid, and information on any retirement accounts like 401(k)s or IRAs including their value.
Compiling key financial documents in one place provides a comprehensive overview of your financial situation and ensures information is readily available throughout your homebuying journey. Regularly updating records with new pay stubs, tax returns, statements, etc. keeps information organized and up to date.
Check your credit
Check your credit score and credit report regularly and frequently for any errors or inaccuracies. It is important to monitor your credit reports from the three major credit bureaus–Equifax, Experian, and TransUnion–on a consistent basis to ensure the information contained within them is correct and up to date. Credit report errors can negatively impact your credit score and make it harder to qualify for a mortgage.
Read our post “Credit Basics for First-Time Women Homebuyers” for more.
Research mortgage options
Researching different mortgage options and interest rates is an important step for any homebuyer. Taking the time to explore the variety of mortgages and interest rates available will help ensure you choose a mortgage that fits your financial needs and situation. Compare fixed-rate vs adjustable-rate mortgages based on how long you’ll stay in the home. Longer terms have lower payments but result in more interest paid, while shorter terms have higher payments, less interest, and are paid off sooner. Remember, down payments of 20% get lower rates. Lower down payments usually result in higher rates, but for some, this approach can be financially beneficial. For interest rates, shop multiple lenders for the best interest rate for your needs.
Compare rates from different lenders
Unfortunately, research has shown that women often face discrimination and receive less favorable mortgage terms than men, even when they have similar financial qualifications. Women are more likely to receive higher interest rates, pay more in fees, and face more stringent requirements to qualify for a mortgage. Women homebuyers should be aware of these practices and take steps to minimize their impact, such as shopping around at multiple lenders, negotiating the best terms possible, and being prepared to contest unfair treatment.
Be sure to compare mortgage rates from different lenders to find a competitive offer with favorable terms. Scrutinizing the fine print of each lender’s proposal is essential to getting the best deal. While the interest rate is obviously a crucial factor, also consider other costs such as fees, closing costs, and penalties. Negotiate with the lenders to see if they can lower their rates and fees, as there is often room for them to drop the prices to win your business.
Lock in the best overall offer that suits your needs and budget to secure your mortgage. Rushing into the first deal you find could cost tens of thousands of dollars more over the life of the loan, so taking the time to thoroughly compare rates from different lenders is well worth the effort.
Submit your application
Submit a mortgage application with the reputable lender of your choice after doing thorough research on the various options available. Once submitted, the lender will review your application and all supporting documents in order to carefully evaluate how much you will be able to borrow.
By verifying the information you have provided and analyzing your ability to repay the loan, the lender can determine an appropriate loan amount that you will be able to pay back on schedule while still meeting your other financial obligations. The lender’s ultimate goal is to lend you an amount that you can repay successfully, while also ensuring that they are able to collect the full loan amount plus accrued interest.
Obtain mortgage pre-approval
Once your loan application has been reviewed and approved by the lender, you will receive an official pre-approval letter with the details of your approved mortgage. This letter will state the maximum loan amount for which you have been approved, the fixed or variable interest rate that will be charged on the loan, and the estimated monthly payment amount that you will owe to the lender to repay the loan.
Receiving a mortgage pre-approval letter indicates that you are in a strong position as a buyer since you know exactly how much you can afford to borrow and bid on a new home. However, a pre-approval is not a guarantee of a loan, and the lender will still need to review the property appraisal and your final loan documents once an offer has been made on a home and gone under contract. As long as there are no major changes in your financial situation or employment status, the pre-approval amount and terms should remain in effect for a certain period of time, often 3-6 months.
In summary, while a basic pre-qualification provides a rough estimate, getting pre-approved by a mortgage lender offers home buyers a number of significant advantages. Specifically, a pre-approval letter signifies to home sellers and real estate agents that you are a serious, qualified buyer, which can give you a competitive advantage.
You’ll also know exactly how much you can afford to spend on a home, enabling you to focus your search on properties that you have a high likelihood of securing financing for. You will also gain valuable insight into how much you can borrow, the interest rates and fees you may qualify for, and what your monthly payments would be for different loan amounts—all of which help ensure there are no surprises later on.
Stick with us to learn more financial fundamentals. And feel free to submit your questions to Dee on Instagram.