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.