Advance Approval: Understanding this Important Step
There are a lot of terms that get tossed around in the real estate industry. Sometimes professionals (ourselves included) forget that the general public does not use industry jargon. Just like we wouldn’t understand two auto mechanics discussing radiator repair, average homeowners are often confused when real estate experts talk about loan-to-value, jumbo loans, or debt-to-income.
During the approval process, for example, you may come across the term “advance approval.” This approval step, while more detailed, can bring significant advantages to the buyer.
But is it the same a “pre-approval?” For that matter, how does it relate to “pre-qualification?” Are they different, or simply different terms for the same thing?
Let’s explore mortgage loan advance approval and help you understand this important term.
Understanding Mortgage Loan Advance Approval
Difference Between Pre-Approval, Pre-Qualification, and Advance Approval
Level 1: Pre-Qualification
Think of pre-qualification as an initial information-gathering step. During this step, you will supply basic financial information to a lender who will then give you an estimate of how much you should be able to borrow. It’s not an official commitment from the lender, but rather a general statement of the amount for which you might qualify. It’s the most informal of all the steps, as all you’ll really need is information on debts, income, and financial assets. With this unofficial information, lenders can give you an estimate over the phone, helping you plan for future home shopping.
Level 2: Pre-Approval
This is the next step in the process, and it is more involved and more official. Pre-approval requires more information, including credit scores, but will give you a document that explains the exact amount for which you qualify. Essentially, you will receive a conditional commitment in writing, allowing you to look for homes within your price range.
Being pre-approved puts you at an advantage when dealing with sellers. With the pre-approval, you can show sellers that you are a motivated buyer who is ready to purchase the home quickly. Having pre-approval also makes your home search more efficient, as you’ll only spend time looking at homes in your stated price range.
Level 3: Advance Approval
Advance approval is an enhanced version of pre-approval with an important step added into the process. With advanced approval, an underwriter takes the pre-approval documents and evaluates them for up-front credit approval. When the buyer chooses a home, the major requirements for lending have already been addressed and all that’s left for final approval are appraisals, updates to documents, and any final conditions.
Advance approval accelerates a closings timeframe. Full approval can happen with fewer constraints, because many of the details are already handled.
Advantages of Advance Approval
If you live in a competitive housing market like San Diego, it can be tough to compete for homes when property is put on the market and sold within 48 hours. Competition is, of course, great for sellers, but if you are looking to buy, it can be a problem. Buyers have to place the very best offer as soon as possible, and they also have to have aggressive timelines so the seller knows they mean business.
Having advance approval helps you move swiftly from touring the home to closing the deal. Sellers will give you more attention because they know you are motivated, increasing your chances of getting the wonderful home you desire. With advance approval, there is less chance that your dream home slips away.
What Will You Need for Advance Approval?
This is a pretty basic step and one of the most convenient to complete. The lender you work with will want to check your driver’s license or ID and your social security number. This is a measure designed to enhance security, but it also gives the lender information they need to check your credit later in the process.
Proof of Income
Due in large part to the financial collapse, loans with no verification or income documentation are no longer acceptable. No matter what type of home loan you are seeking, you need to be prepared with W-2 statements, pay stubs, year-to-date income information, and any additional documents that affect your income. From alimony income to bonuses, the more information you can bring to the table the better.
Proof of Assets
Lenders will want to know that you not only have a hearty regular income, but you also have saved money over the past. This will be especially important to prove that you can provide a significant down payment on the property purchase. Proof of assets usually includes bank statements and investment accounts statements. Proving your current assets will help you qualify for better terms, so bring as much information as you can, including retirement funds if you have them.
To get the best possible interest rates, you need to have a credit score of 740 or better. If your score is below that, you will certainly be able to qualify, but it will be harder for you to get the best possible rates. (You won’t pay an extremely high rate, you just won’t get the lowest.) Proving your credit score is important for all loans, especially government-backed mortgages, which have specific guidelines for credit scores.
While you already have provided income verification through documents, certain lenders will request contact information for your employer. It’s likely that they will want to call your employer for information on your employment status and salary. If you have changed jobs, the lender will likely contact your previous employer as well. If you are self-employed, you’ll have even more paperwork to complete, so be sure to stay organized with your finances.
Get Support and Advice for Advance Approval
Contact San Diego Purchase Loans today to learn more about the loan approval process.
If you want to focus on advance approval to give yourself an advantage in the San Diego home market, we’ll do everything we can to help!