When you’re shopping for a new home, there are a lot of steps in what can be an overwhelming and frustrating process.
Much of that frustration comes from getting mortgage financing.
Before you start to look for a home, you might decide to get pre-qualified or pre-approved. There’s also the option to go through pre-underwriting. When the housing market remains competitive and bidding wars are common, there are some benefits to pre-underwriting, which we detail below.
What is Pre-Qualification?
Pre-qualifying for a loan is a single step on your way to a pre-approval. Pre-qualifying is part of a process when you work with a lender, and they decide the type of guarantee they will give you.
Then, once you get pre-qualified, you would move on to get pre-approved or pre-underwritten.
You don’t have to pre-qualify to do either of the next possible steps, but some people like to do it as their first step because they learn more about what they can afford.
It's a soft pull when you do a pre-qualification before your pre-approval. The pre-qualification won’t hurt your credit score, which is important for your interest rate and whether you’re approved at all.
A lender needs a few basic things for a pre-qualification—your monthly income, estimated monthly debts, and the down payment you can make.
The figure a lender gives you as a pre-qualification amount is estimated and based on assumptions of your financial situation. The number indicates a figure that a lender might be willing to give you, but it’s not definite.
You’ll probably need an actual pre-approval letter to start working with a real estate agent.
Getting a Pre-Approval
While a pre-qualification is a figure the lender would likely lend you, a pre-approval has the terms detailed for their theoretical offer. The details in a pre-approval will include your allowable purchase price, interest rate, and lending fees.
It would be best if you went into the process to shop for a mortgage with a pre-approval in hand. This is what a real estate agent wants to see to work with you to ensure you’re not wasting anyone’s time.
The pre-approval letter is a tentative amount of money that a lender says they would loan to you.
A pre-approval will require a hard pull.
Your lender will probably ask for quite a bit when doing a loan pre-approval. They’ll want to see all your financial information, including your tax returns and bank statements for at least the past 60 days. They’ll want retirement and brokerage statements for the past 60 days, totals for your monthly debt payments, and documents related to any foreclosures or bankruptcies.
Then, There’s Underwriting
Underwriting is the last step to actually getting financing to buy a home. After submitting everything to get approved for a loan, your loan goes through underwriting. This is a time when the lender will closely assess all of your finances to determine their risk level in extending you a mortgage.
This is where you’ll probably run into most of the delays.
Pre-underwriting is when you can go through this step before you’re under contract for a house. An underwriter can do everything on their end that would otherwise come after your offer is accepted before you start looking at properties.
With pre-underwriting, sellers know you’re someone they can have confidence in. You’re showing them there are limited opportunities for surprises or things to go wrong.
In a competitive market, pre-underwriting can be a tool that makes you a very strong candidate, and it can help you win a bidding war, even more so than offering more money.
Pre-underwriting is a somewhat new option, so your lender may not offer it, but if so, it can take some of the stress off of you and make it more likely you will get the home of your dreams.