Buying a dream home is exciting, but applying for a mortgage can be daunting, especially if you’re applying for a mortgage in the US as a nonresident! The application process requires a huge amount of paperwork and documents. There is also usually a lot of uncertainty as to whether you will qualify for a loan and also for what amount you will qualify.

This is especially true if you are a visa holder. Fortunately, mortgage pre-approval can assist you in the process and give you the information you need when hunting for your dream home.

What is Mortgage Pre-Approval?

Mortgage pre-approval is essential preliminary approval for you to take out a mortgage. The mortgage pre-approval process can look like this:

• You approach a lender,
• They check your credit,
• They verify your documents and issue a letter to you which states the amount of loan you will qualify for and the specific length of time you qualify for.

The lender will take into account your financial history to determine the amount you qualify for and the specific terms.

Once you have a pre-approval letter, you will have a better idea of the home you’ll be able to afford and what you will need to budget for. It is also a good indication to sellers that you are serious about buying a house.

Over and above providing certainty and the necessary information, pre-approval is also a great tool to help you shop around for the best lender who will offer you the best terms and rates.

What are the stages of the Mortgage Loan Application Process

Stage 1 – Mortgage Pre-Approval

This is, as explained above, a preliminary approval of a loan amount and loan terms based on the information and documentation provided. The approval letter provides you with the loan amount and terms. You can use this information when you go house hunting.

Stage 2 – Finding a House and Signing the Agreement

Once you know for which loan amount you have been pre-approved, you can start searching for homes within your price range. If you feel you have found the house you want, you can make an offer and sign the purchase agreement. It’s important to know what you’re signing so read this before signing a purchase agreement.

Stage 3 – Mortgage Application

Once you have made an offer and the seller has accepted it, you need to apply for the loan you have been pre-approved for. Most lenders use the same standardized form (the Fannie Mae form 1003). This form requires information about the property being purchased, the loan that will be used and information about yourself. If you did the pre-approval, the lender will have most of the required documentation on hand.

Stage 4 – Mortgage Processing

Your application will be reviewed to ensure that it contains all the necessary documentation and information. This is important, as all the information is required for the mortgage underwriting before your loan can be approved. The information you provided will be verified at this stage and a home appraisal will be done in order to determine the value of the property you want to buy.

Stage 5 – Underwriting

Underwriters take a close look at the information provided to ensure that it complies with the requirements of the lender. Both the borrower and the property must meet the eligibility requirements. The underwriter ultimately makes the decision as to whether the loan is approved or not. The underwriters might come back with a list of conditions that need to be resolved before the loan is finally approved (in such a case you receive conditional approval). If you meet the conditions, your loan will be approved.

Stage 6 – Approval and Closing

If you meet all the requirements your application will be marked “clear to close”. The loan is “closed” when the buyer and the seller sign all the necessary documentation and the funds are disbursed.

What’s the difference between Pre-Qualification and Pre-Approval?

Before you do a mortgage pre-approval, you can also do a mortgage pre-qualification.

Pre-Qualification Explained

With a mortgage pre-qualification, the lender will give you an indication of the loan amount you will qualify for and also some basic loan terms. This process doesn’t require as many details as mortgage pre-approval and the details don’t have to be as accurate.

Pre-Approval Explained

With mortgage pre-approval, a full loan application is completed and your full financial history is taken into account in order for the lender to make you an offer and put that offer to paper.

Which one is better?

Although pre-qualification gives you a good idea with the figures you are working with, pre-approval is much more valuable as you are actually approved based on your actual information (usually for a period of 90 days). The information you get out of a pre-approval is also more accurate.

Remember, with pre-approval, the loan is not granted. The loan is only granted once it has gone through underwriting (a final due diligence check). The loan will also only be finally approved once the loan has been appraised  (i.e. when the loan is applied to the property).

What are the benefits of Pre-Approval?

Apart from the fact that you know exactly what figures you are working with and you can show sellers how serious you are about buying their property, there are other benefits to mortgage pre-approval as well.

Proof of Financial Solvency

Going through the process of mortgage pre-approval will remove the uncertainty as to whether you are actually capable of buying a home. This is just as much of a comfort to you as it will be for the potential seller.

Better Sense of Price Range

With the information provided to you on your mortgage pre-approval, you can determine in what price range you are able to afford a home. This will help narrow down your search and prevent a broken heart if you fell in love with a home you can’t afford. This will also prevent you from missing out on some great homes you didn’t realize actually fell in your price range.

Strengthen your Buyer Status

Showing your loan pre-approval to your potential seller helps portray you as a strong potential buyer. Sellers will rather accept an offer from a buyer who they know actually qualifies for a loan. This will get you ahead if there are more than one potential buyer making offers on your dream home.

Improved Negotiation Ability

Having your loan pre-approved will help you better negotiate a price with your seller and also with possible lenders. If you like a particular lender but they didn’t make you the best offer, having your pre-approval from another lender will help you negotiate better terms.

Closing the Deal Efficiently

Most of your financial information has already been loaded at the lender when you did your pre-approval. This means you can fast-track the process of getting the money and paying the seller once you have signed the contract to purchase.

5 Steps/Requirements to Get a Mortgage Pre-Approval

As mentioned above, when applying for mortgage pre-approval, the lender will look at your financial ability and other documents to determine what loan you qualify for. So what documents will the lender actually look at when processing your mortgage pre-approval?

Proof of Income

You will need your W-2 statements of the past two years, recent pay stubs showing the amount of income you earn and your year-to-date income. You’ll also need to disclose any additional income you earned (like bonus payments) and any tax returns received for the last two years.

Proof of Assets / Balance Sheet

Lenders want to see that you are able to afford the down payment and closing cost that comes with the possible loan. For this reason, you will need to show them bank statements and investment account statements that show your cash reserves.

If you are planning to use money from a friend or a relative to help with your down payment, you will have to show the lender a gift letter. This is to prove that the money wasn’t obtained by means of a loan.

Employment Verification

Lenders want to know if you will be able to pay your loan back in the future, so they don’t only want to know what you have been earning, but also what you will be earning and how you’re earning it. Lenders obviously prefer borrowers with stable jobs and incomes. For this reason, lenders will contact your employer to confirm your salary and also the nature of your employment.

If you have recently changed jobs, they might even call your previous employer. If you are self-employed you’ll have to provide additional documentation proving your business and income.

A Good Credit Score

Lenders prefer borrowers with good credit scores. If your score is 740 or above, you’ll probably be able to get a very low-interest loan. The Federal Housing Administration requires a minimum score of 620. If your score is lower, you might need to make a larger down payment.

Additional Paperwork

You’ll need copies of your Social Security number and driver’s license to apply for mortgage pre-approval. Lenders will ask for your signature so they can pull a full credit report. You can anticipate that the lender will require additional documentation, especially at the actual loan application, so be prepared to provide it as quickly as possible.

Conclusion

Mortgage pre-approval is a great way to provide security when looking for your dream home and prevent you from making offers for homes you can’t afford. If you are on the lookout for your perfect home, you are now fully equipped to do a mortgage pre-approval to simplify the process!

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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