Every time you wish to purchase a home, experts always recommend that you secure a pre-approval. It helps the sellers know you are serious about purchasing a home as well as that you qualify. Without a pre-approval, many realtors and sellers will not show a home. They assume it is a waste of time or puts the sellers at risk if you could not come up with financing. The same standards apply to every loan program, including the USDA pre-approval. You have a much better chance of having your offer accepted when you have a pre-approval.
The Difference Between Pre-Qualification and Pre-Approval
First, you need to understand the difference between pre-qualification and pre-approval. A pre-qualification does not guarantee you a loan. In fact, it really means nothing to a seller or realtor. It is the most basic look at your application to determine your eligibility for the program. It is often the first step lenders take to determine which way to go with your financing, but it does not get your foot in the door with any sellers. The lender will ask you questions about your income, employment, and debts, but will not verify anything at this point.
A pre-approval, on the other hand, is an in-depth look at your finances. It is as serious as it gets before going to an underwriter. The loan officer looks at your credit report, paystubs, W-2s, and tax documents if necessary. He uses these documents to determine your credit risk, debt ratio, and ability to secure a mortgage. Once the lender determines that your qualifications fall in line with the USDA requirements they can issue a pre-approval letter.
What the Pre-Approval Letter States
The pre-approval letter is what the seller looks for when you bid on a home. The right letter will include the following information:
- The loan amount you are approved to receive – This helps the seller feel assured that you could afford the price you bid.
- The dates your pre-approval is good for – All pre-approvals expire after a certain length of time.
- The loan program you will use – In this case, it would be the USDA program. This helps the seller know what to expect, although there are many fallacies out there regarding the USDA program.
- A list of the conditions of the pre-approval from the lender – These are the conditions the underwriter will need to clear in order to fully approve you for the loan.
The pre-approval letter gives the seller an idea of what they would get into if they accepted your offer. Obviously, the fewer conditions on the letter, the better the seller will feel. Many of the conditions are quite common, though, such as an appraisal and inspection. A few other examples include proof of available funds for the closing costs (if you are paying them), proof of a past housing history, and/or proof of employment.
How the USDA Pre-Approval Helps You
The USDA pre-approval can help you in many ways. As we already stated, it helps you get into more homes as sellers are often picky about who they show them home to. It also helps you stay within your designated price range. If you start shopping for a home without a USDA pre-approval letter, you might know how much home you can afford. You might have a number in your head, but until you confirm those numbers and your eligibility with a lender, they are just numbers.
When the lender gives you a maximum loan amount, you need to determine if you are comfortable with the amount provided. You do not have to automatically accept the largest loan amount provided to you. Take the time to figure out how the impending mortgage payment would affect your monthly budget. Don’t just assume that because you qualify for a specific loan amount that you have to take it. Remember, this is your new payment that could last for potentially 30 years. You want to make sure you can comfortably afford it along with your other monthly obligations.
Once you determine the right loan amount for you, it is time to start searching for a home. Because you do not have to make a down payment with the USDA program, you can search for homes for as much as the loan amount you can obtain. This makes shopping for a home slightly easier. As long as the home is within the USDA property boundaries, which you can find on the USDA website, you can find your dream home.
When Should you Secure Pre-Approval?
The timing of a USDA pre-approval is a tricky one. Most pre-approvals expire after 90 days. This is not to say that the lender cannot re-issue it, though. Lenders set an expiration date in order to ensure that nothing drastic changed within your finances. For example, if you took out a new loan between the time you secured a pre-approval and found a home, it could drastically change your debt ratio. If it brings your debt ratio beyond the allowed guidelines, you might lose your pre-approval. This is how the lender keeps tabs on what you do.
That being said, you can secure a pre-approval when you think you are ready to start searching for a home. It may take a while to sort through the eligible USDA areas and finding a home that meets the USDA guidelines. In the meantime, try to make sure you do not change anything about your financial profile. Don’t take out any new credit or make any late payments. The more consistent you keep your financial life, the easier it will be to have your pre-approval re-issued.
Finding a USDA approved home can be a tricky process, but with the right steps, you can make it easier. Take the time to secure a USDA pre-approval to make sure you shop within your means and have a leg up on the competition, especially in the face of a bidding war when you find the home you love.