An Estimate Of What You Can Afford
Basically, the prequalification is an estimate of the loan you could probably get. Because the lender doesnt ask for official documentation and they dont pull your credit report, they dont base the decision on anything official. Instead, they base the prequalification on the information you provide. If you decide to move forward with the lender, its up to you to provide the documentation necessary to prove the information you provided.
Does A Preapproval Letter Expire
Once you have your preapproval letter, you may be wondering how long it lasts. Your income, credit history, interest rate think about all the different ways your finances can change after you get your letter. For this reason, a mortgage preapproval typically lasts for 60 to 90 days.
Once it expires, youll need to connect with your lender again with your updated paperwork and apply for a new preapproval letter. The good news is, this typically doesnt take too much time since they have most of your information on file. But bear in mind that re-applying requires another hard inquiry on your credit rating, and your credit score can be further impacted.
Keep Old Accounts In Good Standing Open
If you have an old credit card that is in good standing, you should not close such an account prior to applying for a mortgage. This is so because old accounts can actually improve your credit score because the credit scoring models take into account your account age. The older your accounts, the better your credit score will be. Also, oftentimes, closing a credit card could actually lower your credit score. So, to avoid this, do not close any accounts prior to being approved for a mortgage.
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Not All Inquiries Are Alike
Soft inquiries just check to see what your number is. They dont have anything to do with a loan or line of credit. For example, you might look up your own number just out of curiosity, or someone whos considering hiring you might do so as part of a background check. Soft inquiries dont affect your credit score at all. In fact, we recommend checking your credit score now so you can see where you stand and have a chance to correct any errors you may find. You can check your score at www.annualcreditreport.com. Its fast, free, and easy.
- You check your own credit
- One of your current creditors checks your credit
- A company checks your credit to see if you qualify for preapproval offers
- You get a new job and your employer pulls your credit report as part of its screening process
Hard inquiries are different. With these, a lender is checking on your financial history to decide whether to give you a loan or line of credit and what kind of rates to charge you. If youre looking for loans or lines of credit, it tells a lender that youre thinking of taking on more debt, which can affect how much youll be able to pay back on your mortgage. Thats why these kinds of inquiries can subtract from your credit scoreespecially if youre applying for a lot of loans at once.
Shop Around For A Great Pre
Just as youll see several homes before settling on the one, you should shop around for the best mortgage rate. Dont just go to your local bank branch and expect to receive a great deal. Do your research and compare mortgage rates, or use a mortgage broker who will negotiate on your behalf.
Even half a percentage point can make a huge difference in your regular payments and the amount of interest youll pay over time. To see what we mean, plug in your numbers into our mortgage payment calculator, then change the interest rate in small steps. Youll very quickly see what we mean!
What happens after your mortgage pre-approval? Generally, youll have a 90 to 120 day period where your offered rate will be held for you. This is when you should start house hunting!
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Determine Your Down Payment
It helps to know how much you can provide as down payment before you start looking for a home. The size of your down payment may have an impact on the amount you get pre-approved for. Plus, down payments of less than 20% of the purchase price of a home require mortgage default insurance, whereas down payments that are 20% or above may not.
Do You Need A Mortgage Pre
- In a hot real estate market its generally a necessity to have a mortgage pre-approval in hand
- While highly recommended, its not an outright requirement
- And it may not be necessary in colder real estate markets
- But its still important to know where you stand regardless of the sellers stance
At the end of the day, you dont necessarily NEED a pre-approval letter to make an offer on a piece of property.
But nowadays, with so few properties on the market, and so many multiple-bid situations, its often a requirement just to hear back from the sellers agent.
Sure, you can tell your real estate agent to tell the listing agent that youve got an 800 credit score, $1 million in the bank, and a job that pays you $500,000 a year. And they might say fine, skip the pre-approval.
But chances are thats not your financial profile, so just to play ball and keep everyone happy, it often makes sense to get the pre-approval done. It will also strengthen your offer. And you might learn or catch something along the way.
As I alluded to earlier in this post, its good to know where you stand as well. You might think youre a sure shot at getting a mortgage, but surprises arent all that uncommon and mortgage underwriting guidelines change all the time.
So a pre-approval could actually save you time and money, despite being a task that needs to be taken care of upfront. It shouldnt take very much work to get one anyway.
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Whats The Use Of A Pre
If the pre-qualification doesnt get you anywhere with sellers, why would you bother? Its basically the first step in the mortgage process. It helps you get an idea of what you can afford. Some of the items you will cover with the loan officer include:
- The length of time at your same job
- How much student debt you carry
- The amount of a down payment you plan to make
- Where your down payment money will originate
This simple information helps the lender determine what you may be able to afford. They use the information you provide to determine approximately how much money you can borrow and what type of loan you will need. For example, if you say you will only put 3.5% down on the home, the lender will likely steer you towards the FHA program. If you say, that you will put 20% down, the lender might go the conventional loan route.
Document Your Income And Assets
Your lender will requiredocumentation to support the info in your loan application. This iswhat makes getting pre-approved different from getting prequalified.
Typically, your lender willrequire the following documents for mortgage pre-approval:
- Identifying documents such as a valid drivers license orSocial Security card
- Last two years W-2sand/or 1099s
- Last two years taxreturns
- Paycheck stubs for last 30 days,if applicable
- Statements from bank accounts,retirement accounts, and other asset accounts
- Divorce decree orseparation agreement, if applicable
- Contactinformation for your landlord for last two years, if applicable
To speed up the pre-approvalprocess, it helps to have these documents in handbefore you get started.
Some lenderscan pulldocuments directly from your employer and bank, but not all. Some can also verify your incomewith the IRS, with your consent.
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Hard Inquiries And Effects On Credit Score
There is no hard and fast rule as to the effect of any one hard inquiry on your credit score, although you can expect to see five points or less per hard inquiry. This shouldn’t be enough to ruin your credit for the loan. The few points would only become a factor if you are on the fence of qualifying for a specific mortgage program such as the 580 FICO threshold for a Federal Housing Administration loan. The drop could begin to affect you as you shop the loan from lender to lender, looking for more favorable terms at different banks and brokerages.
While is is possible for each hard inquiry to ding credit another five points, most mortgage loans should be entered into the system and coded the same way. This means shopping the loan through a course of 45 days should not have any additional negative effects on credit beyond the first inquiry. It is considered the same inquiry. That being said, if lenders are structuring different loan programs, it is possible to see multiple dings to your credit.
Questions To Ask Your Lender Or Broker When Getting Preapproved
When getting preapproved, ask your broker or lender the following:
- how long they guarantee the preapproved rate
- if you will automatically get the lowest rate if interest rates go down while youre preapproved
- if the pre-approval can be extended
Ask your lender or broker about anything you dont understand.
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If Im Prequalified Am I Guaranteed To Get The Card
Prequalification is definitely not a guarantee that youll be approved. Rather, think of it as an invitation to apply.
The good news? Based on the information the credit card company has on you, youre more likely to be approved for those offers you prequalify for. The catch? If you decide you want the card, youll still have to apply.
The credit card company will then perform a hard inquiry and decide whether to approve you for the card, and at what terms. It may be frustrating, but its important to know that its still possible to be rejected even though you prequalified.
On a brighter note, its also possible to be approved for a credit card even if you werent prequalified. This may be the case if youve worked to improve your credit over time or if youre relatively new to credit and your name has never been on a marketing list.
To help minimize your chances of being rejected for a card, you can check your VantageScore 3.0 credit scores from two major credit bureaus and your approval odds for certain cards on Credit Karma.
Does A Mortgage Affect Your Credit Score
Having a mortgage can greatly affect your credit score. If you make your mortgage on time, you can build excellent credit. This is so because your payment history makes up 35% of your credit score. So, making timely payments on your mortgage will boost your credit score.
Additionally, opening a mortgage account can improve your credit mix. Your credit mix makes up 10% of your credit score, and it rewards persons who have a diverse mix of credit accounts with a higher credit score. Opening a variety of different accounts, such as credit cards, car loans, mortgages, and student loans will increase the diversity of your accounts, contributing to a higher credit score.
That said, although a mortgage can increase your credit score in the long run, when you first apply for a mortgage, you could see a small but temporary drop in your credit score. This small drop is caused by the hard inquiry that is placed on your credit report when a lender reviews a copy of your credit report.
That said, the impact that a hard inquiry has on your credit report is temporary. In fact, after 12 months, a hard inquiry will no longer affect your credit score, and it will be removed after 2 years from the date it was added to your credit report.
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How Long Is Preapproval Good For
For this reason, a mortgage preapproval typically lasts for 60 to 90 days. Once it expires, youll need to connect with your lender again with your updated paperwork and apply for a new preapproval letter. The good news is, this typically doesnt take too much time since they have most of your information on file.
Rocket Mortgage By Quicken Loans
This online lender gives you two options for preapproval: a Prequalified Approval and a Verified Approval. The prequalified approval lets you apply online and sync your bank account to verify income and assets for your down payment and closing costs. The verified approval is billed as even stronger and connects you with a lending specialist who performs a full analysis of your assets, income and credit. That option includes a guarantee that Rocket will pay you $1,000 if you dont close on your financing based on its review. For more details, read our Rocket Mortgage review.
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You Could Be In A Stronger Position
A prequalification can put you in a better negotiating position with the seller, points out Peter Boomer, a mortgage executive at PNC Bank although these days, a preapproval holds much more weight.
Still, being prequalified can help let the seller know you mean business, Carrasco says.
Its not uncommon in this market for sellers and their Realtors to insist on seeing a prequalification letter prior to even letting you see the home, Carrasco says. In a hot market, sellers dont care to waste their time preparing their home for a showing and leaving only to have a tire kicker traipse through their house with no means or intentions of buying it.
What Should I Do After Getting My Mortgage Pre
If you get your mortgage pre-approved, congratulations! Look over your conditions carefully and take note of how long your interest rate is locked in so that if you choose to exercise your offer, you will meet all the requirements to do so. Once you find your dream home, do not forget that you will still need to apply for the actual mortgage and get ready to provide needed documents and applications. Your credit scores and documents will still need to be checked to see if you meet the pre-approval conditionsif there have been major changes, your rates and terms may change.
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Is Prequalifying The Same As Getting Approved
While a person may prequalify for a loan, that doesnt mean they will be approved. Prequalification is given strictly based on what the person reports.
During the approval process, a potential borrowers application is examined in greater detail. Employment status, income and debt are verified during the approval process. Credit reports are also checked for things like a history of late payments or bankruptcies. If there are any discrepancies, or the lender comes across information they dont like, a loan can be denied. This is true even if prequalification was previously granted.
What Is Prequalification
A person can request prequalification before applying for almost any type of loan or credit card either through the lender or online. To receive prequalification, borrowers need to provide a few key pieces of information, such as employment status and current income and debt. This step only takes a few minutes to complete, with the results typically provided immediately after submitting the prequalification form.
When dealing with a mortgage lender, you may receive a prequalification letter in the mail from the lender. However, for most other products, youll need to either fill out an online form or speak directly with a representative from the financial institution with which you wish to do business.
Once you receive a prequalification letter, you will need to review the document and decide whether youd like to proceed with applying for the loan.
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What A Mortgage Pre
Once you have been pre-approved for a mortgage, you will receive a pre-approval letter or certificate. You can then use your pre-approval letter as proof to sellers that you will be able to afford the home purchase or use the pre-approval amount to help guide you on your home search. Your pre-approval letter will include information such as:
- Your preapproved mortgage amount: This is the maximum amount that the lender is willing to let you borrow.
- Home price: This is the maximum price of a home that you can afford to buy based on your down payment.
- Mortgage interest rate: This mortgage rate is locked in for a period of time. If you apply and are approved for a mortgage within this period, you are guaranteed to have this rate, even if market rates have increased.
- Expiry date: Mortgage pre-approvals usually have a rate lock that expires in a certain period of time, from 60 days to 120 days. After this date, your mortgage rate is no longer guaranteed.
- Mortgage type: Your letter will show what mortgage terms your pre-approval was based on, such as the amortization, mortgage term, and LTV ratio. Your pre-approval letter may also specify your down payment and monthly mortgage payment amount.
Main Differences Between A Pre
While pre-qualifications and pre-approvals both provide mortgage amounts that a borrower can reasonably expect to be approved for, the two processes have a number of differences, as outlined in the chart below:
|Rough estimate on mortgage amount||Calculated estimate on mortgage amount with written commitment from lender|