Pre-qualification is preferable to pre-approved. Pre-qualification means that a lender has assessed and verified your income, assets, current debts, and credit score, and determined your ability to close the loan, your ability to re-pay the loan, and the size of loan they will lend to you. A pre-approval is a less rigorous review of your financial state than a pre-qualification; while a lender will assess your income and credit score, limited verification steps are normally taken.
In either case, your lender will provide you with a letter that you may share with your offer contract. Typically a pre-qualification letter can be completed in a matter of hours, although some lenders may take longer.
How Does Getting Pre-Qualified Benefit You?
· You will be able to shop with the confidence of knowing your exact price range.
· You can identify credit problems that can be addressed early in the lending process.
· You will typically have more negotiating power, as some sellers see more strength in offers from pre-qualified buyers.
· If you are self-employed or a commission-based buyer, pre-qualification can demonstrate financial backing if your income fluctuates more than those of salaried buyers.
· Pre-qualification gives first-time homebuyers the advantage of equalizing their offer with similar offers made by \ previous homeowners.
Other Pre-Qualification Facts?
· Pre-qualification is offered by most lenders, including at no cost.
· The pre-qualification process is not comprehensive and therefore is not guaranteed, nor is it considered any type of loan commitment. It simply shows that you’ve approached a lender who was serious about helping you determine what you can afford and will walk you through the process.
Why you should maintain a good FICO score
Derived from your credit history report, credit scores are based on points you receive for being a good borrower. The most common scoring system used for mortgage approvals is done by the Fair Issac Corporation (FICO), which accesses the three main credit reporting bureaus (Equifax, TransUnion, and Experian.)
Credit scores can range from a low of 300 points to a high of 850. People with average credit usually score around 620, good credit at 660, and excellent credit above 740. People with higher credit scores more easily obtain mortgage loans and also are able to secure lower interest rates vs. those with lower scores.
Let’s imagine a 30 year fixed mortgage of $300,000. Someone with a credit score of 740 or higher could get a loan at a 4.125% interest rate, and a monthly payment of $1454. Another person with a credit score of 660, however, would get a loan with a higher interest rate of 4.625% and a monthly payment of $1542, a monthly difference of $88 (or annual difference of $1056). Over the life of the loan, this person would pay $31,849 more in interest as compared to the person with a 740 credit score. Another person with a credit score of 620 or below would have an even higher rate and payment, if they were even able to get a mortgage loan.
How to get the best rate
A good strategy for securing the best rate would be to clean-up your credit report at least six months prior to applying for a mortgage loan. Anyone may obtain their credit report for free once a year from www.annualcreditreport.com. Maintaining a debt-to-income ratio of less than 36% could boost your score by as much as 10%. Lenders like to see a history of long-term credit and ability to pay off a loan over time. The goal of any loan applicant should be to make sure their credit report is as accurate and sound as possible.
After you are under contract on a new home, your lender will complete the full loan approval process, lock-in your interest rate for a specified period of time (usually 30 to 60 days), and provide you with an estimate of your closing costs and monthly payments.