Pre-Approval or Pre-Qualification?
While a standard pre-qualification letter is perfectly acceptable, if your financial situation or loan scenario is challenging there is a way to secure a mortgage loan before finding a home.
Unlike a pre-qualification, an underwriting pre-approval entails more than simply speaking with your mortgage professional about your income, savings, credit, and then receiving a pre-qualification letter stating you are qualified to purchase a home. An underwriting pre-approval requires your loan file actually be submitted to an underwriter for review before you find a home (this means you won’t yet have a contract, appraisal or property title).
With or without a property, the loan process is not much different as the underwriter will still need to review your income, assets (checking, savings, stocks etc.), debt and credit. Your loan will be approved or denied based on your credit and financial picture.
Once your loan is approved you can shop for a home with confidence – you’ll have solid financing in place. Your next hurdle will be to find a home and execute a purchase contract.
The final step of the approval process entails review and approval of:
- An executed sales contract.
- A full appraisal of your home or condominium.
- A two year title history of your potential home or condominium.
- Homeowner’s insurance for a single family home or HO6 insurance for a condo.
- If you are purchasing a condo, the building’s budgets, declarations and bylaws and building insurance will need to be reviewed. The building insurance is separate from the HO6 insurance mentioned above.
- Your updated paystubs and asset accounts. Depending on how long it takes you to find a home some of these documents will expire and the underwriter must confirm you are still gainfully employed and your savings hasn’t significantly declined.
The Benefits of Underwriting Pre-Approval
- You can shop for a home with the confidence of knowing you have secured financing.
- You can make an offer on the spot when you find your dream home.
- You can beat out other bidders, and a seller is more likely to entertain your offer as you have already secured solid financing compared to other buyers who haven’t done so.
- You can make a cash offer. Please note: While a cash offer can give you an edge over other aggressive offers, you must be aware that 1) a cash-offer eliminates any mortgage contingencies 2) if you decide, for whatever reason, you want out of the contract you run the risk of forfeiting your earnest money and 3) if you make the offer subject to clean a inspection and/or solid value, you run the risk of weakening your offer.
When entertaining the idea of a cash-offer you should always discuss any legal ramifications with your attorney and mortgage professional.
Note that not everyone needs this type of approval as from a mortgage standpoint, your credit and financial picture may be fairly simple. You should discuss this, and all other options, with your seasoned mortgage professional.
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