The best way to buy a home is with cash. It may sound crazy, but people like you do it every day!  If that’s not feasible for you, you’ll need a home mortgage loan.   Looking to stand out from the buying crowd and land the perfect home? Instantly distance yourself with an underwritten letter of pre-approval.

A Pre-approval is a game-changer. It shows sellers you mean business. You’ve done your research, you know your budget and you’re ready to plunk down some serious cash on a brand-new home. But what exactly is pre-approval and how can it give you a leg up?

Pre-Qualification vs. Pre-Approval

Before merging onto the pre-approval road, you may fuel up at pre-qualification station. To get pre-qualified, a lender evaluates your debt, income and assets to give you a loan estimate for how much you’re likely to be approved. This quick procedure can guide your search and help you explore your mortgage options, but it doesn’t include an analysis of your credit report or an in-depth look at your ability to purchase a home.

For this reason, pre-qualification doesn’t carry the same gravitas as pre-approval. Your pre-qualified amount can help you determine your price range, but it’s not a sure thing. It’s simply the amount for which you might expect to be approved.  Since the terms “mortgage pre-approval” and “mortgage pre-qualification” are often erroneously used interchangeably, it is important to understand how your lender defines the service.

AUS Pre-Approval

An AUS Pre-Approval takes the process to the next level when a lender submits a mortgage application to an Automated Underwriting System (AUS) for approval.  Some lenders leverage technology to get automated underwriting approval on your loan file in minutes, not days.  Benefits of pre-approval with automated underwriting:

• You narrow down your search with an accurate price range.
• Real estate agents and sellers know you’re ready to buy—NOW.
• You can make an offer on the spot when you find your dream home.
• Your offer is stronger than a pre-qualification or pre-approval with no automated underwriting. 

Underwritten Pre-Approval

Once you’ve dipped your toe in the water with an AUS pre-approval, it’s time to make a splash with a fully underwritten pre-approval. You’ll complete an official mortgage application and supply your lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. At this stage, you will most likely not have found a home yet, but you can leave blank any references to “property” on your application.

The basic formula of pre-approval remains the same from lender to lender. A lender reviews your credit report and financial information to determine your approved loan amount. Once the process is complete, your lender can disclose your specific mortgage amount. A lender will need to verify your financial information and submit your loan for preliminary underwriting. But it pays off when you begin your home search because a pre-approval letter shows that you’re a serious buyer.  This can help you pin down your interest rate, and in some cases, you might even be able to lock in a specific rate!

Keep your Pre-Approval 

• Making large purchases on credit. The higher your debts become, the less likely it is you can keep your pre-approval. A large purchase affects your debt ratio as well as your credit score.
• Opening new credit lines. New credit means more debt. This can bring your credit score down.
• Significantly changing your credit history. Paying your debts down could bring your credit score down. The algorithm used to come up with a credit score is complicated. If you drudge up an old debt by paying it off now, your credit score could drop despite your effort at making things right.
• Making unusual deposits. The bank verifies your assets several times during the loan process. Large or inconsistent deposits could raise a red flag. You have to prove where the money came from. You may have to prove you did not incur new debts to obtain the money as well. 
• If buying a home with someone. Make sure you’re both on the same page about your budget and current spending habits.  
  
  

Keep in mind—you still need final approval to close on your home. This can happen once all the underwriter’s requests are approved and a Clear to Close (CTC) is issued.  Pre-approval can put you on the fast-track to home ownership. Now its time to go house hunting!