Shop For Homes During The Preapproval Period
When you receive your preapproval letter, itll probably say its good for 30 to 90 days. Since thats a relatively short period, youll probably want to wait to get preapproval letters until youre ready to start seriously shopping for a home. And remember, a preapproval is only a conditional approval. If you rack up more debt, change jobs or reduce your savings, you could get denied when you go to get final mortgage approval.
Gather The Appropriate Documents
Lenders will want to verify your identity, credit history, employment history, income and financial assets to issue a preapproval. Theyll likely ask you to fill out a uniform residential loan application .
The 1003 application asks for your personal information, financial information and loan information, including
- Bank accounts, retirement and other accounts
- Any other assets you have
- Property you own
- Employer contact information
- Debts you owe or other liabilities
Your lender will also likely do a hard credit inquiry, and may require additional documents based on your individual situation, such as pay stubs, tax returns or bank statements.
Two Smart Homebuying Moves: Mortgage Prequalification And Preapproval
Find out how much house you can borrow before you start looking and how you can make the strongest offer possible on the property you choose.
If youre ready to make your dream of owning a home a reality, youve probably already heard that you should consider getting prequalified or preapproved for a mortgage. Its time to understand exactly what each of those terms means and how they might help you. And when youre working toward a goal this big, you want every advantage.
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What To Provide To Your Lender Or Mortgage Broker
Before preapproving you, a lender or mortgage broker will look at:
- your assets
- your income
Youll need to provide the following:
- proof you can pay for the down payment and closing costs
- information about your other assets, such as a car, cottage or boat
- information about your debts or financial obligations
For proof of employment, you may have to provide:
- a proof of your current salary or hourly pay rate (for example, a recent pay stub
- your position and length of time with the employer
- notices of assessment from the Canada Revenue Agency for the past 2 years, if youre self-employed
Your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments. This will help them determine if you have the down payment.
Your debts or financial obligations may include your monthly payments for:
Keep Your Information Updated
As mentioned earlier, lenders use your credit report for verification purposes. You’ll want to make sure that your information is current, as to not confuse or raise suspicion with your lender.
It also pays to be honest when talking to your lender. Just as you would with a formal loan application, you should be sincere, accurate, and reliable with all the information that you will be sharing to your lender for the pre-approval process.
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How To Get Preapproved For A Mortgage
The preapproval process is essentially a mortgage application. This means your lender will want to take a comprehensive look at your finances. You should be prepared to provide information on the following:
- Proof of income
- Debt-to-income ratio
Before starting the preapproval process, you’ll want the necessary documentation to ensure the process goes smoothly. Here are a few items you should have on hand:
- W-2 statements
- Social Security number
Once you’ve submitted all your information to the lender, you can expect to receive your loan estimate within 3 business days, though this may be much shorter if you use an online lender. The loan estimate will let you know whether you’ve been preapproved and for how much.
What Should I Get Preapproved
In todays housing market, it will be almost impossible to get a seller to consider your offer unless you have a mortgage preapproval . There are simply too many buyers for sellers to be willing to take a chance on one who hasnt at least talked to a lender about getting a mortgage.
Another important reason to get preapproved: It gives you an idea of how much home you can afford based on how much money a lender is prepared to let you borrow. This can save you time during house hunting by eliminating properties out of your price range.
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What Is Recorded On My Credit File
When you apply for a mortgage, credit card, personal loan or any other debt facility, the following will be recording on your credit file:
- The enquiry date.
- The credit amount you applied for.
- The reason for the enquiry.
Generally speaking, banks arent comfortable lending to someone who has made any more than one or two enquiries over a 6-month period.
Apply For A Mortgage Pre
Most Canadians think the first step in the home-buying process is to contact a realtor and start looking at homes. This isnt correct. The first thing you should do is apply for a mortgage pre-approval. After all, if you find a home you like, youll want to move quickly. Being pre-approved for a mortgage removes an extra step in the process.
Being pre-approved also helps you know how much you can afford to spend. You can get a good estimate of how much you can afford with our mortgage affordability calculator. However, the hard limit will always be how much the bank will approve you for a mortgage pre-approval gives you that.
How long does it take to get a mortgage pre-approval? It can be done within an hour if you have your documentation together. Get in touch with a mortgage broker near you to get started.
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What Homebuyers Need To Know After Getting A Mortgage Pre
Serious homebuyers know that gettinga pre-approval from a mortgage lender is the first important step beforethey go out to the market and look for their dream homes. Pre-approval helpshomebuyers determine the amount they could borrow to buy a home. Most sellersaccept offers from homebuyers who have already been pre-approved by a mortgagelender.
You may already understand that a pre-approval is way betterthan a pre-qualification. With a pre-approval, a lender could already offer youto borrow up to a certain amount upon verification of your finances and credit,while a pre-qualification is just a rough estimate whether you could qualify totake out a mortgage or not.
If youre planning to get a mortgage pre-approval, there areimportant things that you need to know once you obtain a pre-approval.
What Are The Best Ways To Build Up My Credit Score Before Applying For Pre
Negative information or a black mark will stay on your credit report for five years. It doesnt mean you cant apply for a home loan, but its likely you will pay a higher rate and higher fees. If you dont require credit immediately then its a good idea to improve your credit score before you apply for a home loan conditional or pre-approval.
The introduction of a comprehensive credit reporting system means there is much more you can do to improve your credit score. Under the previous negative credit reporting system, only negative information was recorded on a credit report and consumers would simply have to wait out the five year black mark period. A comprehensive credit reporting system means that both positive and negative information is recorded. Even if you have a black mark on your credit report, if you can take positive steps toward building your credit score in other areas you may be able to improve your overall credit score.
The following steps may help to improve your credit score:
Lower the limits on your credit cards
Consolidate multiple personal loans
Reduce number of credit cards
Do not make multiple loan applications
Focus on making repayments on time
At least pay the minimum loan repayment
Pay off credit cards in full each month
Negotiate a payment plan with your lender before you default on a loan
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Can You Hurt Your Credit Score By Applying For Multiple Pre
A home loan pre-approval is highly recommended for those buying a home. Home loan pre-approval from a lender gives buyers an idea of what they can borrow and therefore which properties they can realistically afford. The property market can be very competitive, and a pre-approval indicates to real estate agents that you are a serious contender when you find a property. It would then make sense that a buyer with multiple pre-approvals would position themselves as an even stronger contender. Surely a number of pre-approvals increases a buyers chances of actually having at least one lender formally approve their application? Although the reasoning is sound, the opposite is true.
Applying for multiple pre-approvals does not improve your position as a buyer and certainly not as a borrower. Lets take a look at how a pre-approval application affects your credit score and how applying for multiple pre-approvals can actually have a negative impact on your credit report and score.
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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Whats The Difference Between Pre
This is where it gets a little tricky, as theres no hard-and-fast industry-wide definition or process for a pre-approval or pre-qualification. What can help you is taking a look at each mortgage lenders specific process instead.
Whether its called a pre-approval or a pre-qualification, youll likely find a lender will offer one of these two options:
- An informal process that relies on self-reported financial information about your income, assets, etc. Theres no hard inquiry on your credit, and the process can typically be done quickly by phone or online
- A formal process that requires additional paperwork, such as W2s, bank statements, etc., as well as a hard inquiry on your credit history. This process is likely to take longer, but you might come away with a more precise number for how much the lender is willing to loan you. Thats essentially because youve already provided some of the documents required to start the loan application process.
Expert Tip: As you explore options from different lenders, several of them may conduct a hard inquiry on your credit. As long as theyre all within a relatively short time span , it will only count as a single inquiry on your credit history.Differences between the soft credit inquiry and a hard credit inquiry processes
|Soft credit inquiry|
How Long Does Prequalification Or Preapproval Take
Aside from their distinct roles in homebuying, prequalification and preapproval can take different amounts of time. Prequalifying at Bank of America is a quick process that can be done online, and you may get results within an hour. For mortgage preapproval, youll need to supply more information so the application is likely to take more time. You should receive your preapproval letter within 10 business days after youve provided all requested information.
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Will A Pre Approval Hurt My Credit Or Effect My Fico Score
This is a super-logical question to ask. The frank answer is its really the least of your worries! And since youre not really worried, per se, lets rephrase that to: it shouldnt really be even a small, if any, concern for you. Youre about to fry some much bigger fish.
A FICO score is a predictor of financial failure. Right or wrong, fair or not, biased or unbiased, it is universally accepted and is an integral gear in the machinery of the home buying process .
Financing a home with No Credit, or with locked credit bureaus and youll be 10xing your efforts or doubling your cost of financing or maybe both.
Even though the Fair Isaac Company grounds and proves itself through statistics, probabilities, and historical performance there is a logical nature to the score too. For instance, a borrower with very little debt-load would be without an incentive to file bankruptcy. Yet a consumer going on a credit shopping binge could be the harbinger to a lit waxed fuse.
Getting Prequalified Can Reduce Unpleasant Surprises
When used properly, prequalification is a helpful tool that can reduce your chances of being surprised by a credit card rejection or help you determine the odds of being approved for a loan.
Not only does a prequalification letter give you the information you need to decide whether youd like to proceed with a formal application for a loan or credit card, but it can also be submitted with a real estate offer to show buyers youre more likely to get the necessary funding to close on the property.
Obtaining prequalification is usually quick and painless, and most importantly, it wont affect your credit score.
Need help improving your credit score but not sure where to start? !
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Whats Changed With Credit Reporting
Since 12 March 2014, credit reporting agencies like Equifax have been collecting information from some credit providers about when an account is open and closed.
If an enquiry was made and an account opened, it shows that the application for your pre-approval proceeded.
If not, your pre-approval was declined.
Under the Comprehensive Credit Reporting changes made to the Privacy Act 1988, lenders can now build a clearer picture of your character as a borrower.
So even though you made multiple enquiries for a pre-approval, some lenders may be satisfied to lend to you if you were approved for the enquiries.
It sounds great in theory but the problem is that not all lenders are providing this information to credit reporting agencies.
Banks still see multiple enquiries in a short period of time as a negative.
The Bottom Line: Should You Get A Pre
Now that you know how soft and hard inquiries can affect your credit score, should you apply for a pre-approved mortgage? Ultimately, the payoff is worth it, as you will be investing in your own home.
Think of mortgage pre-approval as lining your ducks in a row. You’re preparing yourself for closing on purchasing your new property within a two-week period, rather than spacing it out within months. During this period, avoid applying for other forms of credit, as they will affect your credit score. A good rule of thumb is to secure a few lenders for pre-approval who are on-board with you.
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How Does Mortgage Prequalification Work
A mortgage prequalification can be a good initial step when you’re looking to buy a home. The process varies by lender, but you should expect to be asked for some basic information about your financial situation. For example, a lender might want to know about your income, your monthly bills, how much you’ve saved for a down payment and how much you want to borrow.
Some lenders may also assess your credit with a soft inquirya type of credit check that doesn’t impact credit scoresor ask for your estimated credit score range. You can get a free FICO® Score 8 from Experian to use as an approximation, although mortgage lenders tend to use older FICO® Score models.
Understanding your finances and credit helps a lender determine the loan amount you can afford to pay back and the risk you present as a borrower. Based on the information they see, the lender can prequalify you for different types of mortgages and an estimated loan amount. You may also receive a prequalification letter, which you can share with home sellers and real estate agents to show that you’ll likely be able to buy a home.
What Does A Preapproval Letter Include
A preapproval letter includes your name, the price of the home you gave when requesting the preapproval, the loan amount youre preapproved for and the expiration date of the preapproval. Some lenders also include conditions related to the preapproval in the letter, such as it only applying to a single-family home instead of multi-family property.
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The Two Types Of Credit Inquiries
There are two types of credit inquiries into your credit score. They’re known in the business as soft inquiries and hard inquiries. Only a hard inquiry is an indication that a lender is actively considering extending credit to you or has just done so.
When a consumer fills out an application that accompanies a pre-approved offer, the lender will sometimes use the soft inquiry that has already been pulled to make its decision, or it may pull a new report using a hard inquiry.
A soft inquiry is seen only by the consumer. It has no effect on a credit score, and other lenders cannot see them.
What Does It Mean To Be Preapproved For A Mortgage
A mortgage preapproval is a letter from a lender indicating that you are tentatively approved for a loan. It typically includes a maximum loan amount, interest rate and any other relevant terms or information.
Significantly, getting preapproved for a mortgage doesn’t guarantee you will actually get a loan — or the specific rate and terms on offer. Rather, it’s a statement from the lender stating its intention to lend and the terms involved, assuming the information you’ve provided about your income, employment and financial situation is accurate. It also assumes that there will be no significant changes to your financial situation or credit score — losing your job or taking out another loan, for instance — as these could impact the terms or even disqualify you.
“Many housing markets across the country are struggling with inventory, increasing demand substantially,” said Jefferson Watters, a loan originator for AmeriSave Mortgage Corporation. “A preapproval demonstrates a commitment from the buyer and tells sellers that the buyer is completely qualified to purchase their home. In most cases, if a seller has two equal offers on the table, with the only difference being that one buyer is preapproved, the seller will almost always choose the preapproved offer.”