July 26, 2023
If you’re thinking ahead to the home buying process, your focus may be on finding the neighborhood with the best schools or on finding a fenced backyard for your pets. You may be most interested in the layout of the home itself or the architectural style. As you move forward through the process, however, you’ll probably find that the most time-consuming aspect of your purchase will be the mortgage approval process, beginning with a mortgage pre-approval. How does mortgage financing work and, once approved, how long does a mortgage approval last?
Along with finding the best first time home buyer real estate agent, pre-approval for your mortgage financing should be one of the first steps in your home search. Why? Because it helps you understand how much home you can afford and helps you identify steps you can take to improve your interest rate and eligibility. In addition, once you find the right home, pre-approved financing can help improve your chances of having your offer accepted, especially if you find yourself in a multiple offer situation competing against other buyers.
You may have heard pre-qualification and mortgage pre-approval used interchangeably to describe the preliminary financing process for a home loan. The two are, however, quite different, and a mortgage pre-qualification will not do for you what a mortgage pre-approval can.
During a pre-qualification, which will usually take only minutes, a mortgage lender will ask you a few questions about your income and general financial situation. Based on that conversation and the information you provide, with no further investigation of your finances, the mortgage lender will tell you whether or not you might qualify for a mortgage and how much you might qualify for. If you have given mistaken information or have left out something important from the information you provided, the pre-qualification may not hold up as the mortgage process moves forward.
A mortgage pre-approval, on the other hand, is based on documented information that you provide along with a “hard pull” of your credit history. You may be asked to provide information related to your employment history, taxes, income, and other debts you may be holding. This gives the lender a much more complete picture of your finances and how much you might be able to spend for a home.
Once you find a buyer’s agent, a pre-approval shows that you are serious about buying a home and gives a much better estimate of how much home you could afford. That will help your agent narrow down the right neighborhood and the right type of home for your search. In addition, it gives them the ability to present an offer to a seller that is likely to be taken seriously since it justifies a reasonable expectation that you would be able to see the purchase through to a satisfactory conclusion.
Regardless of the type of home loan that you’re interested in, you should get pre-approved as the first concrete step toward homeownership. You will want to talk to a number of lenders to find out which mortgage product may be right for you. A mortgage loan can include the VA loan, FHA loan, USDA loan, and conventional loans, each with different requirements and different features.
If you are a first-time home buyer, you may want to consider grants and other programs that are designed to help you with down payments and closing costs. Ask your real estate agent for a recommendation to a reliable lender in your area.
During the mortgage loan pre-approval process, your lender will pull your credit to get an idea of your credit history and to determine how much you can afford to pay each month. This can result in a drop of a few points on your credit score. Since you’ll be talking to a few different lenders, several credit pulls could have a negative impact on your score.
The good news is that there is a special exception for multiple credit inquiries from lenders within a 14 day period. That means that as long as you are organized and apply for your various pre-approvals within the same time period, you may be able to minimize the impact on your credit score.
While a credit inquiry remains on your credit report for up to two years, its actual impact as a determining factor on your credit score is much shorter, usually just a few months. In general, an inquiry will drop your score five points or fewer, while for particularly strong credit scores, the effect may be even less.
Generally speaking, mortgage approvals last around 90 days, though some expire sooner and others later. Talk to your lender and find out how long their mortgage approvals last. At the same time, ask about options they provide for extensions in case you need a little more time for your home search.
The reason that mortgage lenders put an expiration date on mortgage approval is because your financial picture can change dramatically in just a few weeks or months. Economic shifts or the loss of a job could make a big difference in your household income – and in the home loan amount you qualify for.
There are aspects of the home buying process that are, frankly, beyond your control. You may face multiple offer situations, tough negotiations, or a home inspection that makes you rethink your plans for that dream home. However, much of the mortgage pre-approval process, and the subsequent underwriting process, is well within your control. Here are some of the factors to consider:
Even before you begin the pre-approval process, you should start early optimizing your credit score so that you’re in good financial shape when you begin your home search. This includes paying bills on time and minimizing your use of any outstanding credit. It also means applying for your free credit report so that you can check for errors or outdated information that could be impacting your credit score.
You’ll need to save money for your down payment as well as for closing costs, inspections, and other fees associated with the purchase process. You’ll need to be able to provide information about that money, including bank statements that indicate the source of your deposits. Keep in mind, if you have family members contributing to your down payment, you’ll need to talk to your lender about documentation for these gifts as they will be required during the underwriting process.
You may have heard the saying “champagne taste on a beer budget.” It means that someone has a taste for luxury without the budget to back it up. Make sure you go into your home search knowing the answer to, ‘How much money do I need to buy a house?’ It’s also important to know what you can afford, including neighborhood, home size, finishes, and amenities, all of which can impact your home’s cost. If you are not yet at a point where you can afford the home you want, determine whether you can adjust your expectations or whether you need to save up some additional funds.
The home purchase process can have many twists and turns, including title issues, unexpected repairs, or sellers who dig in their heels during the negotiation process. In addition, your underwriter may require a mountain of paperwork before providing the all-important final clear-to-close. Be prepared and keep your end goal in mind so that you can manage the requirements of your purchase while still keeping your sense of humor and patience intact.
You’ll want new furniture for the house or a new car to park in the driveway. While this is only natural, you risk undermining your mortgage approval by taking on new debt or spending too much money. Talk to your real estate agent before making any big financial decisions and hold off on new purchases until after the closing on your home.
Buying a home is an exciting process, but you need expert help along the way. If you are wondering when you should contact a realtor to buy a house, the answer is ASAP. Newzip connects you with the best real estate professionals in your market so that you have the guidance you need to make the important decisions that lie ahead. The Newzip agent finder helps to match you with an agent who is uniquely qualified to answer your questions and provide expert insight. What’s more your agent can connect you with their professional network, including a lender who can provide more information and answer the question, ‘How long does pre-approval last?”
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