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Understanding the Home Loan Pre Approval Process

To understand the home loan pre approval process, you first have to understand some basics about buying a house.

Prequalifying for a Home Loan

When you begin your search for a house, most of your time is spent just finding properties that fit within the guidelines of what you can afford and what meets your needs. But, unfortunately, you won't find out if you qualify until an offer is accepted on the property and it's time to close.

Lenders will look at your credit reports and earnings to determine if you're qualified and what interest rate and payment you qualify for. This is called the preapproval process, where they give you a letter that says how much house you can afford and an estimate on the maximum interest rate.

Pre Approval does not mean you've been approved for a loan; it provides an estimate on costs and terms on properties in your price range based on the information lenders know about you. When looking for properties, make sure to let real estate agents or seller's agents know that you're pre approved so they won't waste your time with homes out of your loan price range.

Approving a Home Loan

If your offer is accepted, then approval of the loan is based on the property and its appraised value. This is when you find out what your exact monthly payment will be, and you will be presented with the exact terms of your home loan.

Second, lenders spend lots of time crunching numbers and making sure their assumptions are correct before approving a house loan. They want to know that the buyer has enough income to pay off what he or she borrows, that the appraiser's estimate of value is accurate and that the market price will support the buyer's ability to repay his or her mortgage debts in full each month.

Lenders know from experience what percentage of loans become delinquent within two years based on how much buyers earn, where they live, etc., so they have an idea about safety levels for each loan they approve. This is called risk-based pricing, where interest rates are based on credit scores, debt ratios, and other factors that affect the safety of a loan.

Starting the Home-Buying Process

You should begin your home-buying process by checking with at least three lenders to determine what you will qualify for in terms of payment and financing. Then, once you find homes within your price range, look for sellers who have dropped the selling price. This means there has been less competition to buy the property, so it's more likely you can negotiate another drop or other concessions.

Your real estate agent can help give you creditors' names and phone numbers to contact when looking for pre approval before you make an offer on any property. Then, your job is simply finding homes you like and making an offer.

Home loans do not carry a set interest rate for the life of the loan. Instead, rates on mortgages can fluctuate daily and usually rise as interest rates increase. The home loan pre approval process is designed to help borrowers find out upfront about their potential costs. They can then compare those costs to houses they want to buy before entering into a binding contract on one house.

It can be confusing at first. However, it's also your best protection against buying more house than you can afford or being forced to pay higher interest rates than you expected because you waited too long between getting prequalified, getting an offer accepted, or closing on a property.