A loan pre-approval is one of the best things to have before applying for a loan. Experts always recommend this prudent first step no matter what type of loan one applies for.
What’s a loan pre-approval?
Getting preapproved for a loan sends a clear message to lenders that you can handle a loan. Think of it as a certificate of your financial capability to pay back a loan and its interest.
To get pre-approved for a loan, lenders will check your finances and credit rating. From here, they can tell you the exact amount of the loan for which you are approved. This is also a good way to learn about the interest rate you’ll be charged for that loan.
It should be noted that getting pre-approved for a loan doesn’t guarantee one’s application for an actual loan will push through. Getting pre-approval for a loan, however, does make application for an actual loan easier.
Pre-approval vs. pre-qualification
Pre-approval and pre-qualification are two terms that are often interchanged. It’s important to know the difference.
In pre-qualification, a lender gives you an idea of how much you can borrow based on the income and expenditures you provide. It is simply an assessment based on your say so – no documentation or paperwork is required. It’s often free online.
In contrast, getting pre-approved involves completing a mortgage application, paying an application fee, and providing proof of financial stability.
The benefits of pre-approval
Pre-approvals put you, the borrower, at an advantage. Here’s why:
- You can search for a home that is within the price range of the pre-approved amount.
- Your interest in a prospective property bears more weight to a seller because your financial wherewithal has been certified.
- You’ll get the opportunity to discuss loan options and budgeting with your lender.
- Potential problems, such as a spotty credit record can be identified.This can be corrected before the actual loan application begins.
- Lenders prefer to negotiate with people who show proof that they can obtain financing. And getting pre-approved is the best way you can go about this.
How does one get preapproved for a loan?
To start the pre-approval process, you’ll need to present the following:
- Estimated purchase cost.
- Gauge the best possible asking price. This is so you’ll know how much you need to borrow.
- Down payment amount.
- Your down payment will affect the pre-approval in a big way.
- Basic personal information. Your
- Social Security number, etc.
- Proof of income. Recent paystubs, tax returns, etc.
- Proof of assets.
- Bank statements and pertinent documents
- Estimated credit score.
- Order a copy of your credit scores from one of the credit bureaus (Equifax, TransUnion, and Experian). By law, you’re also entitled to one free credit history report a year from each of the bureaus.
Once you’ve gathered all necessary information, you can either apply online or personally visit a lender to get assessed.
It should be noted that getting preapproved for a loan carries no obligation to carry on with the actual loan.
Simply put, it’s not necessary to borrow money once you get preapproved. The lender who screened you is not required to offer you a loan as well.
However, getting preapproved for a loan is still a good idea. By consulting with a lender, you get to avoid plenty of pitfalls and perhaps even get a head start on making an offer.
Best of all, you get to align your expectations with your financial reality.