People who know me know that I sometimes (aka often) take the road less traveled — and my homebuying story is no different.
My rental lease was ending and I decided to browse listings online out of curiosity. I saw a cute property listed for a reasonable price, so I emailed the seller's agent asking to see it. I looked at the condo alone the next day, went home and played with mortgage calculators, looked at my finances, and decided to take it a step further by reaching out to my own agent. (Note that people typically get an agent first). The agent asked if I had a pre-approval letter and I said, "Huh?" Then he explained the pre-approval process and why it was so important.
So, I got in touch with a lender and filled out a loan application. My lender asked me to provide W–2 statements, bank statements, credit report and tax returns. This information helps lenders evaluate borrowers 4 Cs to determine how much they may be qualified to borrow:
- Capacity: Your current and future ability to make your payments
- Capital or cash reserves: The money, savings and investments you have that can be sold quickly for cash
- Collateral: The home, or type of home, that you would like to purchase
- Credit: Your history of paying bills and other debts on time
If your lender determines that you qualify for a loan, they'll provide you with a pre–approval letter outlining the maximum amount you are qualified to borrow. Keep in mind that the amount your lender is willing to lend is not always how much you should borrow. (Only borrow what you feel you can comfortably repay.) Also, pre–approvals are usually good for only a limited time, so you should be sure to discuss this with your lender.
Once you receive your letter, it's time to house hunt (that is, if you follow the typical homebuying timeline)! In regard to my story, the pre–approval played a major role in showing the seller how committed and qualified I was as a buyer. Remember, I bought during Spring Homebuying Season, so the market was hot — just like it is right now. And, while I did things a little backward there's one piece of advice I highly recommend: get a pre–approval letter regardless. It helps educate you and the seller, which ultimately makes the entire process smoother.
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