If you’re looking to get a loan for a car, a home, or another major purchase, you might consider looking for pre-approval. The pre-approval process is easy
, and it can make the rest of your loan application process more straightforward and more reliable. But what exactly is pre-approval, and why is it so valuable for car and home loans?
In the lending world, pre-approval is a preliminary evaluation of a prospective borrower. It’s an opportunity for the lender to determine the borrower’s credibility and financial status; if the borrower meets certain criteria, they may receive a “pre-qualification offer,”
outlining the type of loan a borrower may qualify for.
Many people believe that pre-approval is done purely for the agent’s benefit, or for the lender’s benefit. While there are some perks for the lender, including having more time to evaluate a borrower, there are also a number of advantages for borrowers.
Why Borrowers Should Seek Pre-Approval
Pre-approval helps you in a number of different ways:
● Budgeting. First, getting pre-approved allows you to budget more accurately. For example, let’s say you’re thinking about buying a home in the range of $250,000 to $400,000, but you haven’t gotten pre-approval yet. When the pre-approval comes through, you find out you’ve been pre-approved for a loan of up to $350,000. This would hypothetically allow you to buy a $400,000 home with a $50,000 down payment, or other homes in this range with a smaller down payment. With this information, you can spend more time looking at homes that are comfortably in your range, and you can more accurately forecast your budgetary needs.
● Confidence. Shopping for a new car or a new house can be stressful, especially if you’re not sure about your financial strength. What if you’re not approved for the loan that you need? While pre-approval doesn’t guarantee that you’ll be offered a full loan, in most cases, pre-approval is enough to give you confidence that you’ll be able to move forward with this deal.
● Time savings
. On average, it takes somewhere between 30 and 45 days to close on a home
. There are many steps you’ll need to take, including finalizing the financing and filling out the paperwork. There aren’t many things that can make this process go faster, but pre-approval is one of them; with pre-approval in place, you’ll find it much easier to complete the steps to finalize your loan, and you can move into your new house faster.
● Negotiating power. With a letter of pre-approval, you’ll have some negotiating power. You’ll have documentation of your credibility, and evidence that you’re serious about making a major purchase. From there, you may feel confident shopping around and looking at different lenders, attempting to find the best possible rate.
What You’ll Need to Be Pre-Approved
Different lenders have different pre-approval processes, but in general, you’ll need these items to be pre-approved for a major loan:
● Identification. It goes without saying you’ll need a few forms of identification to prove you are who you say you are. If this step wasn’t required, identity theft could run rampant. Be prepared to show a photo ID, a social security card, and possibly some other forms of ID.
● Proof of income. You’ll also need proof of income, which can help the lender calculate exactly what type of loan you may qualify for. The more income you have, and the more consistent it is, the bigger the loan you can get. Be sure to gather your W-2s and your 1099s from recent years to demonstrate your earning history.
● Verification of employment. It also helps to verify your current employment status. You may have a recent history of significant income, but your lender may also want to call your employer and ask them about your employment status. This is especially important if you’ve recently changed jobs.
● Proof of assets. Depending on the circumstances, you may also need to provide proof of assets. For example, do you currently have enough money in your bank account to afford a down payment? Are you going to need to get private mortgage insurance (PMI)?
● A good credit score
. Your FICO credit score
is one of the most commonly considered metrics for financial credibility in the United States. The higher your credit score is, the better; you’ll qualify for loans of more money (and on better terms as well).
Pre-approval is a relatively simple step that can help you shop more confidently, and set you up for a better loan. It’s not just for the lender’s benefit—it can also benefit you directly—so make sure you take advantage of this step if you’re serious about buying a new house or a new car.