June 19, 2023
The importance of getting preapproved as a first-time homebuyer
If this is your first time submitting a mortgage application, it's normal to wonder how a preapproval works. Understanding various parts of the loan process can be challenging for a first-time homebuyer. Remember, you are not alone. With a preapproval comes many benefits, like understanding your budget, appearing as a serious buyer to sellers, and negotiating confidently. Opting for a preapproval brings you closer to purchasing your dream home without surprises.
Preapproval vs. Prequalification
During the mortgage process, you might hear different parties use the terms prequalification and preapproval interchangeably, but it's important to know there are key differences.
Both a prequalification and preapproval provide borrowers with an estimated idea of how much home they can afford. However, a preapproval is a more official estimation requiring your loan originator to verify loan conditions with documentation such as pay stubs, tax returns, and a social security number. On the other hand, a prequalification is a less official inquiry of income and assets that does not affect your credit score and provides a rough estimate of how much home you can afford.
Which Should You Apply For?
If you are serious and ready to begin your home buying journey, a preapproval letter provides an accurate budget before house hunting. Hitting the real estate market without a plan wastes time, depletes energy, and might leave you discouraged when a more prepared buyer wins the bid. With a preapproval, the calculation of expected interest rates and qualification of specific loan programs are predetermined.
A prequalification is a good choice if you are still deciding whether or not you are ready to purchase a home. Since a prequalification doesn’t involve a credit check, your score is not affected. A prequalification can give a rough estimate while you build a long-term budget or a plan to elevate your credit score for when you're ready to purchase a home.
Getting a preapproval letter
An official preapproval letter states you are approved to borrow a specific amount of money based on your income, assets, and credit history. It allows more bargaining power with agents and sellers as it speeds up the closing process and eliminates surprises. In fact, many sellers, and specific cities in competitive real estate markets, require a preapproval before making an offer.
Reasons to get preapproved
One good thing about getting a mortgage preapproval is that there are no downsides. It speeds up your mortgage experience and puts you in a better position to bargain. Are you still feeling a little confused? Here's a simple breakdown of all the positives of securing a mortgage preapproval.
- Know your budget.
Understanding how much home you can afford and the loan programs you qualify for makes the home shopping experience run smoothly. Now, you can create a long-term budget to define your search even further. Remember, small details like the period of time you plan to live in the home can also affect mortgage rates and the type of loan program that best fits your financial goals.
- Negotiate with confidence.
In competitive markets and populous cities, many sellers only accept offers from preapproved buyers. Without a preapproval, the deal might fall through at the last minute. A preapproval provides security for the seller and places you ahead of other buyers who haven’t secured their financing.
- Close faster.
When originating loans, a lot of information and documentation is collected. Applying for a preapproval obtains most of the information necessary to originate a loan upfront, speeding up the loan process and eliminating any financial surprises.
If you get declined for a preapproval
We understand the frustration that comes with getting declined for a preapproval. If this happens to you, there are a few ways to make sure you qualify in the future. Follow these simple steps to get your financial goals back on track.
- Find out why you got declined.
There are many reasons why someone might get declined for mortgage financing. Be sure to speak with your loan originator and have them give a detailed explanation to understand where to make improvements or changes.
- Get credit report errors corrected.
Obtain a copy of your credit report and determine if there are any errors on your credit report. If you spot errors on your credit report, you can dispute them by contacting a credit reporting company.
- Improve your credit score.
If you need to improve your credit score, asking your loan originator for resources is a great place to start. You can also utilize assistance from online credit counselors and counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD).
If you're serious about purchasing your first home, it's time to contact your loan originator and apply for a preapproval. After all, there are no downsides to securing a preapproval except home shopping without one!