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Loan shopping is as intricate a process as house shopping, and the terminology is
often confusing. The terms "pre-qualification" and "pre-approval" sound like the same thing, but they're
not. And in fact, neither pre-qualification nor pre-approval means a bank actually has to give you the loan. Clear as mud, right? Don't worry -- the loan approval process is fairly straightforward,
as long as you understand a few key points:
- Pre-qualification is the first step you can take -- but it's not mandatory.
If you want a ballpark idea of how much a bank will loan you so that you can shop within your price range, pre-qualification
is a quick and easy way to find out. Most banks and credit unions will do this over the phone, and your credit history will
usually not be checked. A loan officer asks you about your income, assets, debts and projected down payment and then calculates
what kind of loan you'd likely qualify for. The process takes just a few minutes.
- Pre-approval is more involved and usually requires an appointment. In
this step, the lending institution gathers all the information it requires to offer you a loan, and your credit report will
be checked; you may be charged a fee for this at the time of the appointment. You'll need to bring some items with you
to document your identity and your assets
- A copy of your most recent bank statements (this
includes your daily checking account as well as any money market, savings or other accounts)
- Your most recent W-2 (or entire tax return if you're self-employed)
- Proof of IRAs or retirement accounts and their current balances
- Ditto
for any stocks or mutual funds you own outside of retirement accounts
- Your
driver's license
- The most recent month's paystub(s) from your
job
- An application fee (this depends on the lender)
- The result of the pre-approval process is the good faith estimate. At
the end of the pre-approval process, if the bank looks you over and likes what it sees, you'll receive what's called
a good faith estimate (GFE), which is a brief document spelling out the likely terms of the loan, including the interest rate,
loan type (fixed-rate, adjustable and so on) and closing costs.
- The pre-approval step may be a bit time-consuming, but you'll need to complete it with a few lenders
in order to comparison-shop. Without a GFE, you can't truly compare terms among lenders. And it pays to compare
-- for a loan as large as a mortgage, little things like the interest rate make a big difference. To negotiate for a great
interest rate, reduced closing costs, or lender-paid private mortgage insurance, you have to make lenders compete with each
other. (Lining up GFEs is also a good way to spot lenders who charge unnecessary fees.) So don't just accept the first
offer you get -- make sure it's a good one by soliciting several in a short time period. Don't worry about nicking
your credit score with several loan applications, because credit scoring recognizes multiple checks in quick succession as
part of the loan-shopping process and does not penalize you.
- Pre-approval does not mean the bank guarantees you the loan. It just means that you're approved
to get the loan -- unless something goes wrong. Commitment to the loan generally comes after the bank has had the house in
question appraised to make sure the price you're paying isn't higher than the home's market value. This protects
them in case you default on the loan, which would leave them in the red even if they evicted you and sold the property. Banks
also check to make sure the home has a clear title and that you've insured it for replacement value.
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