Are you looking to buy a house and obtain a loan but are worried about being outbid by another interested buyer? Don’t be: Bidding on a house is done differently when it’s through Bungalo. By buying direct, you can submit an offer online in mere minutes. And since we operate on a first come, first served basis, you won’t have to worry about the potential for not offering enough or too much.
However, there’s a catch: You first need pre-approval. But if you think that pre-approval is difficult or will put you at a disadvantage, think again. It’s actually just the opposite. Pre-approval puts you in the proverbial driver’s seat, allowing you to know how much house you can afford — whether you’re paying by cash or through a home loan — and make an offer faster.
But before we dive into how to get pre-approved to buy a house, let’s talk a little more about why you should.
Why is it important to get pre-approved?
Pre-approval is a smart move for a number of reasons. One of which is it establishes guardrails for how much money you can realistically spend when taking into account your current financial situation and income. Buying a house for many people is the biggest purchase they’ll ever make in their entire lives. According to the latest statistics on real estate prices from the National Association of Realtors, the typical house nowadays sells for approximately $359,900 as of July 2021.
Obtaining pre-approval from your mortgage lender — usually in the form of a pre-approval letter — gives you a guideline of how much you can afford to borrow based on your income, budget and available assets. Mortgage pre-approval can also make finding a house in listings easier by eliminating certain real estate options from contention given the cost.
The Bungalo app makes browsing for a home simple with the price filter function. You can set the floor and ceiling for how much you can spend, which will help you narrow down which house will be the ultimate winner until you find “the one.”
Another advantage of mortgage loan pre-approval is for the seller. Naturally, the seller needs to be certain that those they’re selling to are financially secure and serious about buying. The loan pre-approval letter provides them with that rest assurance by minimizing risk. Assuming the offer is accepted, the mortgage lender pays them the requisite amount, then you pay back the lender with interest over however many years. Simple as that.
What is the difference between a mortgage pre-approval and a mortgage prequalification letter?
What isn’t quite as straightforward is understanding how a mortgage pre-approval differs from pre-qualification. You’ve probably heard these terms before and thought, “Hmmm, must be the same thing.” While there are definitely a lot of similarities and the terms do get used interchangeably — wrongly, as it happens — they’re not identical.
In layman’s terms, mortgage pre-approval is a much more thorough vetting process of a prospective buyer. While both pre-qualification and pre-approval provide borrowers with an estimate as to what they can spend — which, come to think of it, maybe why the terms are often confused — pre-approval is a step up from mortgage pre-qualification. For example, if you’ve obtained a mortgage pre-qualification letter, your mortgage lender may not have assessed your credit score by pulling your credit report. They may also not have asked to see certain documents that they do require to get a mortgage pre-approval letter, such as tax information.
Additionally, because the mortgage pre-approval process is typically more involved than pre-qualification, it may take a bit longer to receive word on whether you are approved.
What information do you need for mortgage pre-approval?
Now that you know the why of mortgage pre-approval, how do you actually get that all-important pre approval letter? The truth is every process is different in terms of what a lender wants to see to determine your financial ability. In addition to filling out an application, here are a few of the pieces of information you’ll likely be asked to collect. Most of the items requested are designed to assess your financial wellness, which goes further than income level:
- Proof of employment
- Pay stubs (two most recent checks)
- W-2 forms (usually from the past two years)
- Bank statements showing your available savings
- Retirement accounts (e.g. 401(k), CDs, IRAs, stocks, bonds, etc.)
- Copy of your credit report
Your credit report — and accompanying credit score — contains a lot of information (e.g. accounts, date the accounts were opened, credit limits, balances, etc.), but it primarily allows your mortgage lender to see if you’re consistent about making your payments in a timely manner. Generally speaking, the higher the credit score, the better. Additionally, having a high credit score makes it more likely that you’ll be able to take out a loan at a low interest rate.
There are a number of ways to obtain your credit report. You are entitled to one free credit report every year from any of the three credit bureaus, TransUnion, Equifax and Experian. It should be as simple as visiting the website. However, it’s also possible that your lender may be able to pull your credit report for you, but they’ll of course need your permission in order to do that as well as certain personal information, such as your Social Security number, mailing address, date of birth and the like. Once again, pre-approval is not on
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