When, Why, and How to Update Your Pre-Approval Letter
In previous years, the pre-qualification letter was all sellers needed from potential buyers. This document, which is similar but different than pre-approval, would grant you access to numerous homes, allowing you to look at properties and have your offer accepted by buyers. (Assuming an offer was made.)
But now, more sellers, as well as their real estate agents, are requesting pre-approval letters. Pre-qualification is a fast and simple process. By contacting a mortgage professional and giving them a few numbers, you can complete pre-qualification over the phone. The loan officer asks about your job, your income, and your credit (but does not verify any of it), and you are granted pre-qualification up to a certain amount.
Pre-qualification used to be the standard. But now, more sellers are asking for pre-approval letters. Pre-approval takes it a bit further, actually verifying the information provided to mortgage agents. It checks your credit reports firsthand. Basically, it’s a more detailed, trustworthy process, and it’s becoming an essential part of the buying process.
Why is Pre-Approval Needed Anyhow?
To put it bluntly, sellers and real estate agents don’t like wasting time. They want to ensure that every potential buyer is financially capable of making the purchase. They want every possible assurance that if an offer is made, the buyer will be approved for a loan that supports the purchase.
First of all, the seller and agent could be wasting valuable time and resources on people who may not be able to make the purchase. If an offer is accepted, the seller will pull the property from the marketplace; if the buyer is unable to get the loan, the seller could loose months or even weeks of valuable selling time.
When, Why, and How to Update Your Pre-Approval Letter
Why Update the Pre-Approval Letter?
Once you have a pre-approval letter, you can view a variety of homes. But few find a home right away. For many, the search takes months, sometimes years to find the right home at the right price in the right area. The search for a home, even in a buyer’s market, can be frustrating and time-consuming. It can also be mentally, emotionally, and physically exhausting.
By the time you find a home and make an offer, it could be half a year since you were pre-approved. In those six months, you could have lost a job, taken on new expenses, or had a reduction in your income. Knowing this, seller’s agents often request that a pre-approval letter be updated on a regular basis.
There are also positive reasons to update your pre-approval letter. Suppose you get pre-approved for $750,000 in January, but in February you take a new job that increases your income by 25%. You haven’t purchased a home yet, but your pre-approval was based on your past income, which was previously lower. You can now go to your mortgage agent and talk with them about updating your letter, which could result in pre-approval for, say, $1 million. (Note: This is an example only. A 25% increase in income does not translate into 25% increase in borrowing potential.)
When to Update Your Pre-Approval Letter
When Four Months Have Passed Since Approval
This is probably the most common reason to update your pre-approval letter. If four months have gone by, sellers and real estate agents may prefer that a mortgage agent reissue your pre-approval letter, providing reassurance that everything is verified and up-to-date. Four months, however, is not a hard rule. For most people, three months to a half a year is a good time frame.
When You Have a Change in Income
If your income has changed, it obviously changes your borrowing capabilities. If your income has gone up, there is a chance that you now have more borrowing potential. Therefore, if you were limited before on your loan limit, you may be able to increase that number. On the other hand, if your income has declined, you’ll want to have your pre-approval letter reviewed. You’re going to have to disclose the change in income eventually, so you might as well talk with your lender right away.
When Your Credit Score Has Dropped or Increased
If, for whatever reason, you have had a change in your credit score, talk with your lender about reissuing a pre-approval letter. Just like income, this change can adjust your borrowing potential, so you may be able to borrow more or less depending on the results.
When Your Assets and Property Have Changed
Many loans are dependent on specific assets. You may have been issued pre-approval for a certain amount based on the fact that your assets include, for example, another $500,000 in valued property. But if you no longer own this property, it could change your ability to borrow a higher amount. Likewise, if you suddenly own something of significant value, such as real estate or even cash, your borrowing potential could be increased.
When You Have New Debts or Have Eliminated Debts
Your debt load is an important factor for many lenders, so if the amount that you owe has changed, your borrowing potential will be adjusted as well.
How to Update Pre-Approval Letter
Changing your pre-approval letter is simple. Essentially, you only need to contact the lender who issued your pre-approval (or work with another if you desire) and tell them that you need to update your letter. You’ll then go through the same basic process that you went through before, usually providing income, job, and credit information, as well as documents on assets and debts.
Once complete, you’ll be re-issued a letter and you can continue your search for your dream home!
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