You’re scrolling the online listings, looking for houses, when — boom — the love of your real estate life pops out from the page. You’ve found the perfect home, with the best imaginable location, layout, size, finishes, and price. You’re ready to buy.
Just one problem: You haven’t started looking for a loan yet. And the seller will only accept offers from pre-approved buyers. Unfortunately, you won’t be able to make that happen by tomorrow.
Getting a loan, even a pre-approval, doesn’t happen overnight. There are key hoops you must jump through. How long should a borrower expect each step to take? And why must you start before you begin your hunt, especially in a competitive market? Let’s take a look.
Step 1: Comparison shopping for loans.
It’s unlikely you would buy a car, piece of furniture, or appliance without shopping around. You definitely shouldn’t take on a 30-year loan without some serious research.
Search for mortgage providers online, and visit a local bank or credit union. Schedule a meeting with a mortgage loan officer, who will pull your credit (more on that below) and give you a reasonable estimate of the interest rate, closing costs and terms you can expect. Then expand your search to other financial institutions, including community banks or other credit unions, or continue looking online, and compare the terms you’re offered from each bank.
Although each lender will look up your credit information, you don’t need to worry every inquiry will hurt your credit score. The Fair Isaac Corporation, or FICO, allows people to “rate-shop” for a mortgage without dinging their credit scores, as long as you do all of your shopping within a 14-day window. Abide by that timeline and the credit bureaus will regard that first credit pull as a “ding” but ignore the subsequent ones.
Helpful tip: When comparing lenders, pay attention to the annual percentage rate (APR), not just the interest rate. The APR covers the “total cost” of borrowing, including loan origination fees and other ancillary costs.
Total Time: 14 days.
Step 2: Get a pre-qualification letter.
Most buyers will require your pre-qualification letter before they’ll even consider your offer — but don’t worry, this step is quick and easy.
Ask any of the lenders with whom you spoke to during your mortgage shopping spree for a pre-qualification letter. These are relatively easy to get and simply give a rough, unverified estimate of the loan size you may qualify to receive. Most lenders will give you a pre-qualification based on your verbal self-reporting of your income, assets, debts, and down payment size.
Helpful tip: You don’t need to take out a loan from the same lender that gave you your pre-qualification letter.
Total Time: one to three days (overlapping with the timeframe for the first step)
Step 3: Get pre-approved.
The pre-approval stage is when lenders verify everything you’ve told them. You’ll need to supply identification documents such as your Social Security card, proof of income, assets, and employment, as well as records of any debts you hold. The lender will pull a credit report.
If you have a simple situation, such as stable employment with no debt, this process can be as short as one to two weeks. If you’re self-employed, own several other houses, have had a previous divorce or bankruptcy, have a pending court case or lawsuit against you, are in the U.S. on a temporary visa, or have other complicating factors, the loan officer may require additional documentation, which can extend the process several weeks or months.
Once you’re pre-approved, you’ll receive a conditional letter stating the exact amount of loan for which you’re approved.
Helpful tip: All else being equal, sellers often prefer to work with buyers who have pre-approval letters, rather than pre-qualification letters, particularly in a competitive market where homes get multiple bids.
Total Time: one week to several months
Step 4: Final loan approval.
Armed with your pre-approval letter, you make an offer on your dream home and it’s accepted. (Hooray!) Next, you’ll need the lender to conduct an appraisal.
In this instance, an appraisal is official verification that you’re buying the home at a reasonable market value. It protects the lender from the risk of loaning an unreasonable sum, such as $300,000 on a house that should be valued at $220,000.
Scheduling a time for a licensed appraiser to visit the property is frequently the longest part, and may take up to two weeks (depending on availability in your area, as well as the flexibility of the seller). Once the appraiser makes a home visit, the approval (or rejection) comes through within a day or two.
Time: three days to two or more weeks
The good news? Now that you’ve passed the appraisal process, you’re ready to close on this loan — and this house. Enjoy the moment, before you have to start packing.