Many real estate agents want to see some proof that you qualify for a mortgage before they'll even take you out to see a house. A prequalification or preapproval letter shows the realtor and homeowners that you are both serious about buying a home and that you can get the funding you need.
Prequalification vs. Preapproval
These terms are sometimes used interchangeably in the real estate industry, so it's important to find out from your mortgage lender what each entails. In some cases, “prequalifying” for a mortgage is a less exhaustive and authoritative process than preapproval for finding out how much a bank is willing to lend you. You simply give the lender information about your income, debts, assets and credit score; the lender then lets you know for how much of a mortgage you qualify, usually with minimum verification. In a preapproval, the lender verifies your financial status by examining your credit report, pay stubs, tax returns and documentation of other debts and assets. Your preapproval letter states how much that lender is willing to lend you, based on a documented review of your finances.
House Hunting Prep
Before talking to a mortgage lender, make sure that your financial house is in order. Order your credit reports from all three major credit bureaus. You can get one free report from each credit bureau every 12 months. You should also get your FICO credit score, which is a number based on your credit history that helps lenders evaluate your credit risk. You'll have to pay for your FICO score. Check your credit reports for errors and, if you find any, dispute them with the credit bureaus. If your reports contain negative, but accurate, information, be prepared to explain that to a lender. Many lenders want to see zero balances on old, closed accounts, so if you have any charge-offs or unpaid judgments, take care of those before applying for a mortgage.
Not Over 'till It's Over
Mortgage preapproval doesn't guarantee you a home. If something goes wrong before you close on your mortgage, such as losing your job or an old debt reappears on your credit report, your lender can change the terms of your loan or pull out of the deal altogether.
If the mortgage process makes you nervous, you aren't alone. Many people find the process intimidating. If you need help understanding the mortgage qualification process, or selecting the right loan for you, talk to a housing counselor. The United States Department of Housing and Urban Development (HUD) offers housing counseling services that can help you understand your rights and options when buying a home.
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