How to Get Pre-Approved for a Brand-New Home
There’s nothing more exciting than building a home from the ground up. Watching your dream home transform from blueprints to a physical structure is one of the best feelings in the world. But, before you can make your dream home a reality, you first want to get pre-approved.
Here’s everything you need to know about pre-approval, including the benefits and the steps you need to take to get the ball rolling with your lender.
What is pre-approval?
A pre-approval letter shows that you’re qualified for a specific mortgage loan amount. When buying a new construction home, most builders require a pre-approval letter before beginning construction.
Since your home will be customized to your specifications, the builder needs reassurance that you are a viable buyer who can purchase the home once it’s ready.
It’s important to note that pre-approval is not a guarantee that you will be approved to buy any home. Before a loan is approved, the home must be appraised to ensure that you aren’t taking out a loan that’s more than the home’s value.
Are pre-qualification and pre-approval the same?
While these terms are sometimes used interchangeably, pre-qualification and pre-approval aren’t the same. Pre-qualification is the first step in the process. It can give you a general idea of how much home you can afford, but it’s not official and can be unreliable.
With this process, your mortgage lender or a financial institution will quickly look at your debt, credit, income, and assets. They will then estimate whether you qualify for a mortgage, and if so, how large of an amount you can borrow.
After receiving the green light during pre-qualification, pre-approval is the next step. During this process, you will need to submit to a credit check and provide the below documents:
- Copies of pay stubs
- Bank account statements
- W-2 statements
- Tax returns
In most cases, along with pre-approval, you will also need to provide a down payment prior to obtaining your loan.
If you’re confident in your financial readiness and credit score, you can skip pre-qualification and go directly to your lender to be pre-approved.
Benefits of getting pre-approved
Though the process means more paperwork up front, at the end of the day, getting pre-approved is well worth the effort. By getting pre-approved for a mortgage, you know what you can afford and won’t spend time looking at homes that you don’t want or can’t buy. Other benefits to keep in mind include:
- You get some of the paperwork done early and are closer to owning a home
- Builders know you are a serious and capable buyer
- You have confidence and proof that you can afford the homes you are looking at
- Your closing process will be faster and less stressful
Getting pre-approved also gives you plenty of time to address any credit errors that are negatively impacting your credit score.
The do’s and don’ts of pre-approval
Once you’re ready to get pre-approved for a mortgage loan, it’s important to know what you should and shouldn’t do to increase your chances of a positive outcome. Here are some of the most important things to keep in mind.
Do know your credit score
Before reaching out to a lender, whether it’s a local credit union or an online lender like Quicken Loans, check your credit score (for free!). You want your score to be no lower than 620, and the higher your score, the better.
Having a high credit score shows that you’re a worthy borrower. In turn, you’re more likely to get approved at a lower interest rate, which will save you thousands of dollars over the life of the loan.
Review your report and if you notice any discrepancies, work to resolve them immediately.
Don’t make big credit changes
One of the worst things you can do after getting pre-approved for a loan is to apply for new credit or to greatly increase your debt-to-income ratio.
Remember, you were pre-approved for a loan based on your current credit score, which is impacted by new credit applications as well as large credit purchases.
Avoid making financial decisions that will have a drastic negative impact on your score. Otherwise, you may no longer qualify for the requested loan amount.
Do shop around for a lender
As a previous or current homeowner, you may be tempted to go with a lender that you’ve used in the past. But what if another lender is offering a lower interest rate or better terms?
When buying a new construction home, always shop around for the right lender. Compare offers and rates and see which lender provides the best loan terms.
You will also want to communicate with your homebuilder to see if they have a preferred lender or a simple buying process that is easy to understand and less stressful. Choosing the builder’s preferred lender can often lead to extra incentives or savings.
Don’t change employers
Financial stability is important throughout the pre-approval and buying process. Don’t make drastic changes to your employment status or lifestyle. Don’t quit your job before purchasing your new home. Doing so is a huge red flag to lenders, who may now see you as a riskier borrower.
The one exception to this rule is a positive employment change. For example, if you get promoted or add a new line of income, your mortgage application won’t be negatively affected.
Gather financial documents
Getting pre-approved for a mortgage requires a lot of personal and financial documents. The sooner you can start gathering these files, the quicker and less stressful the process will be. Make sure that you have access to income tax forms, bank and investment account information, proof of income, and other documents.
Being prepared ahead of time greatly lessens the risk of a setback that pauses the pre-approval process.
Building a brand-new home is an experience of a lifetime. While designing your home and figuring out all the small details, it’s all too easy to forget about the not so fun parts of buying a home.
To make the buying process as easy as possible, work with your lender of choice to get pre-approved. This way you have a good idea of how big of a mortgage loan you can afford while also showing your builder that you’re in a good financial position to buy the home once it’s complete.
*It’s important to know that every individual situation is unique, and some financial institutions may ask for different information depending on your situation.