Buying a Home: The Pre-Approval Process

According to the National Association of Realtors, close to 90% of all buyers require a loan when they purchase their home.  If you are a first time home buyer, you might be wondering how you go about getting a loan for more money than you have ever needed before!

There are many different kinds of loan packages available to buyers right now.  Talk to a lender to find out what is best for you.  Different programs will allow you to put as little as 3% down, compared to the 20% standard people have heard.  A loan officer should be able to help you find the best plan for your circumstances.  Your credit and your income will help decide what program is best for you.

Your goal in finding a lender is to find someone who is upfront and honest who can give you the best terms.  Right now, interest rates are still pretty low, but it is good to shop around.

So you know that you need to get pre-approved.  What does it mean?  I found this quote from an article from Realtor.com that summed it up well.

"Pre-approval" means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a pre approval letter, which shows your borrowing power. You can visit as many lenders as you like and get several pre-approvals, but keep in mind that each one carries with it a new credit check, which will show up on future credit reports.

Although not a final loan commitment, the pre approval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.

That last point is important - this is not a final loan commitment.  There are unfortunately cases where people are pre-approved, make an offer on a house, and then can't obtain financing.  Pre-approval is a quick check, and a means of showing that you are qualified for a loan to the seller of the home that you are buying.
Typically, within a short period of time after making an offer, you will need to go and make formal loan application.  My contracts are always written with a five day window.  So having a pre-approval letter makes sense in two ways.  First, many listing agents are specifically asking for pre-approval letters with an offer.  Having your letter in hand is great for when you find that perfect house you want to write an offer on.  The other thing that helps is that you will already have had contact with a lender who has all of your information.  It is usually easy to finish the loan application process with that lender.

I hope this helps.  I work with a lot of first time buyers and I would be happy to help you wherever you are in the process!