Shopping for a loan is important before you start shopping for your dream home.
“Pre-qualification” and “pre-approval” sound like the same thing, but they are not.
The loan approval process is quite straightforward, as long as you understand a few key points:
Pre-qualification is the first step you can take.
Find out how much a bank will loan you so that you can shop within your price range
Most banks and credit unions will do this over the phone
A loan officer will ask you about your income, assets, debts and projected down payment –> calculates what kind of loan you’d likely qualify for. The process takes just a few minutes.
Pre-approval is more involved and usually requires an appointment.
The lending institution gathers all the information it requires to offer you a loan, and your credit report will be checked; you may be charged a fee for this at the time of the appointment. You’ll need to bring some items with you to document your identity and your assets:
A copy of your most recent bank statements (this includes your daily checking account as well as any money market, savings or other accounts)
Your most recent W-2 (or entire tax return if you’re self-employed)
Proof of IRAs or retirement accounts and their current balances
Stocks or mutual funds you own outside of retirement accounts
Your driver’s license
The most recent month’s paystub(s)
An application fee (this depends on the lender)
The result of the pre-approval process is the good faith estimate.
If the bank looks you over and likes what it sees, you’ll receive a good faith estimate (GFE)
-> Brief document spelling out the likely terms of the loan, including the interest rate, loan type (fixed-rate, adjustable and so on) and closing costs.
You might want to complete the pre-approval with a few lenders in order to compare terms among lenders.
It pays to compare for a loan as large as a mortgage, for example the interest rate can make a big difference. To negotiate for a great interest rate, reduced closing costs, or lender-paid private mortgage insurance, you have to make lenders compete with each other. (Lining up GFEs is also a good way to spot lenders who charge unnecessary fees.) Don’t just accept the first offer you get — make sure it’s a good one.
Pre-approval does not mean the bank guarantees you the loan.
It means that you’re approved to get a loan — unless something goes wrong
Commitment to the loan generally comes after the bank has had the house in question appraised
Banks also check to make sure the home has a clear title and that you’ve insured it for replacement value.