What is a loan application?

The loan application is a detailed form that lenders use to evaluate whether or not they can give you a loan, and if so, the amount of money they can lend you. Lender applications vary by company, but on the application you may be asked to provide all or some of the following:
❑ Bank account balances and account numbers, as well as bank branch address
❑ Information about where you work or what sources of income you have
❑ Outstanding debts (including loans and credit cards with names and addresses of creditors)
Once this information is provided, the lender will pore over your financial situation, based on that information, and suggest programs that most closely meet your needs. If your financial situation doesn’t measure up, the lender may also suggest steps you can take (cleaning up your credit, paying down some of your monthly debt, for example) to get it into mortgageworthy shape. If this happens, bear in mind that not all lenders are alike, and that some may be more willing to extend flexible programs to first-time home buyers while others may be more stringent with their criteria. If you run into issues working directly with a bank, for example, find a good mortgage broker (unlike banks, these folks have a knack for matching lenders with borrowers who need help getting their finances in order) and have that person work on the preapproval for you.
It’s not a final loan commitment, but a preapproval letter does show that you’ve taken steps to get the ball rolling on the financing before spending time on your house hunt. It shows your financial strength and proves that you’re not just out there ‘‘kicking tires’’ but that you have the wherewithal to follow through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained. It also helps you, as the home buyer, to know exactly where you stand when it comes to how much you can pay for a home when you enter into a purchasing agreement.

What is a preapproval letter?

A preapproval letter tells home sellers that you have the ability to qualify for a certain mortgage amount, as judged by your lender. The process helps the lender determine the size of mortgage that you qualify for and helps you decide the price ranges to spend your time looking at. Unlike a prequalification, the preapproval process is very thorough, with the lender doing most of the review work required for a full approval, with the exception of the appraisal and title search (which can’t be completed until you’ve identified a home to buy).
Preapproval helps you to:
❑ Know how much you can borrow.
❑ Confirm your ability to qualify for a mortgage based on your credit, financial, and employment information.
❑ Strengthen your position to make an offer on a house. (A seller will
be more willing to accept an offer if the buyer is preapproved.) To become preapproved, you’ll need to work with a mortgage lender who will review your credit history, earnings information, employment history and assets. You can get this done in person, or via telephone and/or fax and the Internet. Here are the basic items that the lender will want to see:
❑ A loan application
❑ Verification of your employment (pay stubs, W-2s, and/or tax returns if you are self-employed)
❑ Information concerning any other sources of income (such as alimony)
❑ Source of cash for your down payment and closing costs
❑ Authorization to have your credit checked

What is a prequalification letter?

A lender’s prequalification process will give you a ballpark estimate of how large a mortgage you can afford. It doesn’t matter which lender you obtain this from since nearly all of them use the same criteria when determining what size monthly mortgage payments, property tax bill, and homeowners insurance you can handle. This will give you a good idea of the maximum mortgage amount you can afford and will help you focus your house search on properties within your price range.
Lenders, real estate agents, online financial Web sites, and other resources all use pretty much the same formula to figure out what priced home you can afford. You’ll want to figure this out before you start house hunting, since your budget can have a significant impact on your new home’s size, style, and age. The more amenities and square footage a home has and the newer it is, the more expensive it will be. By obtaining a mortgage prequalification letter prior to embarking on your house hunt, you’ll have a much better idea of exactly what you can afford.