Mortgage Management For Dummies
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Before you get serious about making an offer on a new home, obtain from your mortgage lender a prequalification letter at minimum, or better yet, a preapproval letter. A preapproval letter from a lender is much more significant than a prequalification letter. Prequalification often takes just a few minutes, and many lenders provide this service at no cost to you. However, a prequalification letter is a nonbinding offer by the lender to provide you a loan for a certain amount of money. The problem with a prequalification letter is that the lender hasn’t verified your financial information. Rather, they’re indicating that if everything you stated can be verified and your credit rating is solid, they will provide you with this loan.

Preapproval, on the other hand, involves your lender actually verifying the financial information you provide. The lender will contact anyone they need to receive verification of your income, assets, debts, and credit history. After it verifies this information, it issues a letter stating that you are approved for a certain amount of mortgage for a certain period of time. Some lenders charge a small fee to provide a preapproval letter; however, this fee is generally refunded to you at closing.

You have several very good reasons for obtaining a preapproval letter prior to entering into any negotiations regarding the house purchase, including the following:

  • Your mortgage company has done a thorough review of your financial information and has provided you with the letter stating that they will give you a loan for a certain amount of money. It’s obligating itself to provide you with this loan. A potential buyer who already has a preapproval letter from a lender stands a much better chance of having his purchase offer accepted than someone who is making their offer contingent upon obtaining financing.

  • The preapproval letter provides you with confirmation of how much money (loan plus your down payment) you have available to spend on your new home.

Preapproved borrowers are attractive to potential sellers. Sellers don’t need to worry that if they accept your offer, you could be turned down for a loan. Also, you may be able to close more quickly than another competing buyer, because you have already completed the time-consuming process of being approved for your mortgage.

If your financial circumstances change significantly from preapproval to closing, your preapproval letter may no longer be valid. Contact your lender immediately if your circumstances change.

To obtain a prequalification letter, preapproval letter, and eventually a mortgage, you need to pull together the following information and documents:

  • Employment and income: Be able to answer these questions about your employment: Where do you work? How long have you worked there? How long have you worked in the industry? What is your annual income? How is your compensation derived? How stable is your income?

  • Liabilities: What current debts do you have? What is your minimum monthly payment required to satisfy these debts? What is the actual monthly payment that you’ve been applying toward these debts? Of your total debts, how much is directly applicable to credit cards and auto loans?

  • Assets: What is your current bank balance? Where will the money come from to make your down payment and pay any closing costs and discount points, if applicable?

  • Credit: The lender won’t typically ask you any questions about your credit history and instead pulls a copy of your credit report.

Review your credit report personally to make certain that you have done everything possible to improve its accuracy prior to making loan application.

Documents that you need to provide to your lender or prospective lender are listed in the Documents Needed for a Mortgage Application Worksheet. As you prepare to apply for your loan, you can use this checklist to make sure that you have all the necessary information.


Click here to download and print the Documents Needed for a Mortgage Application Worksheet.

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