Unless you're paying cash, you follow a set of steps when you buy a home:
- Final or Full Approval
The First Step
Getting prequalified tells home sellers that you're not just out looking for decorating ideas – you're serious, and they should take you seriously. In fact, many real estate agents and property sellers won't even want to talk to you until you've been prequalified. There is no industry standard for what constitutes a prequalification. For many lenders, it means asking you a few questions like:
- How much do you earn?
- What are your monthly debt payments?
- How's your credit?
- How much do you have in bank accounts and investments?
Prequalifying at its most basic doesn't involve a credit check, and your income won't be verified. In that case, the lender is providing an estimate of how much you may be able to borrow, and does not guarantee that you'll be approved for a mortgage. However, other lenders do a much more extensive prequalification. They may (with your permission) check your credit. They might ask you for pay stubs and bank statements. In this case, prequalification is almost as good as an actual loan approval, and it's much more reliable and useful to you.
Preapproval and Full Approval
Preapproval is a more advanced process. To secure your mortgage preapproval, you must complete a mortgage application and supply whatever documents the lender requires – you may sign authorizations for employment verification and credit reports, and submit W-2 forms, tax returns and copies of statements for deposit and investment accounts. Be prepared to address any gaps in employment and explain past problems in your credit history. Self-employed borrowers can expect to provide additional documentation such as profit-and-loss statements.
Eventually, you'll find a property and open escrow. The lender orders an appraisal and verifies property characteristics like private roads,wells and septic systems, homeowners associations – making sure that everything complies with its guidelines. If that's the case, you'll get a final approval notice and you can schedule your closing.
Approval Expiration Date
It's important to advise all parties of the expiration of your mortgage pre-approval or final approval. Keep in touch with the lender that issued your approval letter, and call your loan officer immediately if delays could postpone closing.
If your home purchase takes weeks or months, plan on updating your documents periodically to keep your approval current.
One Last Thing
Sometimes a lender may issue a pre-qualification or pre-approval letter for a bigger loan than you expected. You needn't borrow the amount shown in the letter.
You are the best judge of your financial goals and limitations. In the short run, it can be easy to be swept off your feet by a home that stretches you to the maximum. In the long run, buying a home with a lower mortgage amount and monthly payment can provide financial flexibility. Not sure how much you should spend? Tools like LendingTree's Home Affordability calculator can help you – input your income, debts and assets, and you'll receive three amounts based on conservative, middle-of-the-road or aggressive scenarios.