Today we’re going to be discussing what is a pre approval letter? You hear everyone talking about it, but you’re wondering, what the heck are these people even saying to me? Whether it’s your parents, your relatives, or even your real estate agent. So, within this blog post I’m going to break down what a pre approval letter is and why you need one.
Explanation of a Pre Approval Letter
A pre approval letter, in layman’s terms definition is, a letter from your lender or banking institution that states how much house you can afford. It all relies on how much income you make, your debt to income ratio & your credit history/score.
How do they generate a pre approval letter? And how do you get one?
Well, you just go and talk to your mortgage lender & ask if you can get pre approved. Nowadays most of this is done online through an online application.
Apply for a Pre Approval Here… Apply Now
Once you talk with the mortgage lender they will pre-approve you up to a certain dollar amount. They’ll check your credit, your credit history, your debt to income ratio, your actual income that you’re bringing in on a monthly and yearly basis. And then, they’ll generate a number on how much house you can afford.
Basic Rules About Pre Approvals
I always say it’s probably smart to stay below the pre approved value just so you’re not house poor. Definition of House Poor: Your monthly house payment is so much that it doesn’t allow you to afford to do anything else.
You want to be comfortable with your house payment each month. You don’t want to be stretching it too far.
Does a pre approval letter mean I am automatically qualified to purchase a home? Unfortunately, even if you have a pre approval letter you may not be able to purchase a home. This would be the scenario if you lost your job or something drastically changed with your financial history. Also, be weary of mortgage lenders who give you a pre approval with the preface that you need to still “improve” certain qualities in your financial profile. Example: “Hey John, you’re approved up to 130k, but I need you to get your credit score from a 620 to a 645 before we can fund a loan”.
Why Do You Need a Pre Approval
Now, why do you need one? Why do realtors always ask, “are you pre-approved?” The simple explanation for this is most real estate agents don’t want to show a buyer homes who is not pre approved because then they are not sure if they will be paid for their work or time spent. For example, if you have something on your credit history or credit report that would deter you from ever being able to obtain a loan, the real estate agent would want to know that first, rather than six months down the road after they’ve showed you hundreds of houses. That is why it’s so important to get pre approved beforehand. Also, you have an idea on how much house you can afford so you only look at homes in your price range!
I always recommend my to wait to get the actual pre approval till you’re ready to write an offer. And what I mean by this is, a lender can look at your debt to income, yearly income, and check background prior to pulling your credit.
Then when it’s time to do the actual pre approval, they will pull your credit. Pulling your credit for a pre approval does ding your credit score a little bit each time and the pre approval is only good for 90 days. Just be cautious to continually pull a new credit report.
How can I help?
If you have questions or you want assistance in buying your first house, please reach out to me. Fill out the form down below, or give me a call or text on my cell phone, which is (920) 252-2864. Have a great day, you guys. I appreciate you watching.