Getting a mortgage pre-qualification letter gets the ball rolling when you're ready to start the home buying process. During pre-qualification, you’ll give the lender information about your income and assets. And after checking your credit, the bank estimates how much you can afford to spend on a house.
A pre-qualification is an initial step, and although not required when shopping for a house, it carries weight. This letter means you’re a serious buyer, which grabs a seller’s attention. But it not only provides sellers with information about your eligibility, it also includes crucial information about your loan.
Here is what you can expect to find in a basic pre-qualification letter:
1. Buyer’s name(s)
The pre-qualification letter will start by stating your name and the name of any co-borrowers on the application, as well as the name of the mortgage lender. Sellers and realtors need this information for verification purposes.
2. Estimated approval amount
Based on income information given to the lender, your pre-qualification letter includes your approval amount. If you're pre-qualified for $250,000, you can purchase a property up to this amount. Realtors and sellers need to know how much you're eligible to receive. If you’re pre-qualified for an amount that’s high enough to cover the sale price of a property, the seller is more likely to consider your offer. Your letter may also include information about the loan purpose, such as whether the loan is for a residential property or a commercial property.
3. Type of mortgage
The home seller may not be interested in the type of mortgage you're pre-qualified for, so this information is for your benefit. It’s important to know exactly what you're getting with regard to your mortgage loan program.
There are various programs to choose from and your pre-qualification letter will mention the type of mortgage – for example, a conventional, FHA, VA or USDA loan. It also will include information about whether you have a fixed-rate or an adjustable-rate, plus explain the details of an adjustable-rate mortgage (5/1 or 7/1 ARM). In this case, your interest rate will be fixed for the first five or seven years, and then adjust every year thereafter. Your mortgage pre-qualification letter also contains information about your mortgage term, such as 15 years or 30 years.
4. Interest rate
Your mortgage pre-qualification letter will mention the interest rate you qualify for, which is based on several factors including the size of your down payment and your credit history. It's important to note that the interest rate you’re quoted may change by the time you are ready to close on a home. This is due to the fact that interest rates can change on a day-to-day basis. The mortgage lender may quote an interest rate of 3.6% APR at the time you complete the pre-qualification application. But if it takes 30 days to close on the mortgage, your actual interest rate could be slightly higher or slightly lower. Talk to your lender about a rate lock. Many banks will lock your rate for a specific length of time for a flat fee.
If the mortgage loan is contingent on different factors, the lender will most likely include these contingencies with your pre-qualification letter. For example, if you're buying a new home, the mortgage may be contingent on the successful sale of your current property, or the lender may only approve the loan if you're able to find a suitable renter for the property. This can occur when your income is not enough to support two mortgage payments at the same time. The letter will likely include a contingency that says the loan is subject to an acceptable home appraisal.
6. Issue and Expiration Dates
Every pre-qualification letter includes dates. This is because pre-qualification letters typically expire after 60 or 90 days. This gives most homebuyers ample time to find a property. The letter will include the date the letter was issued and an expiration date. If you don't find a house before the pre-qualification letter expires, you can still purchase a property, but the bank will recheck your income and credit to ensure you're still eligible for the loan. If your income, credit and employment status hasn’t changed, there shouldn’t be an issue with getting an updated letter.