The simple answer to this question is: yes because it’s beneficial to you as a potential borrower to have different rates from different lenders competing for your business. But, why is it? Home buying can be a complicated endeavor, especially when you may be doing it for the first time. There are a lot of questions that you may not have even thought to ask before you decided to stop renting and look for a more permanent home. That is the easy part, you decided that your family needs more space or you need to move to a new area to pursue your career, but then comes the actual searching and buying processes.
One of the first things you will run into when trying to find a real estate agent to help you on your journey to your new home is a preapproval letter. If you did not know this was a thing or helpful in the journey, you’re not alone. Most of the time when buying a new home you will need to take out a mortgage on the home, meaning you will need to borrow the money from a lender, which you will then pay back with interest. Everyone’s heard of a mortgage before, but a preapproval letter may not have been on top of your list of priorities.
What a preapproval letter does is show real estate agents and sellers that your finances have been reviewed by a potential lender and you will be able to get a loan that will cover the price range of the home you are pursuing. In the quest for your dream home, you want to make sure there are no obstacles in the way of you locking your dream home down. A preapproval letter achieves this goal by showing a seller that you mean business and you can afford their home because you have a lender to back you up by stating they are willing to lend you the money in the future to cover the amount needed.
What do I need for a Preapproval Letter?
Now, we know that we should have a preapproval letter, but what do you need to get one? Lenders will have a mortgage application that you will need to fill out, they will provide that. Some applications come with a fee, but that amount could potentially be deducted from the closing costs if you chose that lender. The potential lender will need you to provide the following to be evaluated:
- Your credit
- Your employment (be ready to show at least three months of pay stubs)
- Your assets and debts (be ready to show at least three months of bank statements)
- Your identification (This could be your driver’s license, passport, or in some cases your social security card)
Based on this information a lender will give you the specific amount that you can borrow and a gauge of what your potential interest rate may be. The second part of that statement is very important. Interest rates are determined by a lot of different factors, some are your finances (I.e. How risky the lender thinks your loan might be), and others can change daily based on the market as well as the federal government. If this rate is lower it can result in lower monthly mortgage payments, which in turn could save you thousands of dollars annually, and the flip side of that is also true. Secondly, because when you are paying for your mortgage the bulk of your initial payments are going towards your interest, and then your principal (the actual value of your loan), a lower interest rate will lead to you building equity in your home sooner. This is why it is important to get preapproved by multiple lenders; getting the best interest rate is significantly beneficial to you.
Let’s look at an example where we focus on the interest rates from multiple lenders and how a lower interest rate could equal savings. You have found your dream home: a lovely $350,000 colonial in your neighborhood of choice that will fit your family of four and has a large yard for the dogs. You’ve saved the money for the down payment, $70,000, and you’re now ready to start the process of pursuing this home. You know step one now, getting a preapproval letter from multiple lenders.
You apply for three preapproval letters from Loaner A, Loaner B, and Loaner C. Thankfully for this example, all the Lenders approve you for the $350,000 you need for the home, but they all give you different interest rates. Let’s look at how all these affect the amount of interest you will be paying throughout the loan. For this example the relevant numbers are:
- Home Value: $350,000
- Down Payment: $70,000
- Loan Amount $280,000
Lender A – Interest rate of 3.25%:
At this calculated interest rate, based on the numbers above, the total interest amount that you will pay over the lifetime of the loan is $158,687.97.
Lender B – Interest rate of 3.00%:
At this calculated interest rate, based on the numbers above, the total interest amount that you will pay over the lifetime of the loan is $144,976.87.
Lender C – Interest rate of 2.75%:
At this calculated interest rate, based on the numbers above, the total interest amount that you will pay over the lifetime of the loan is $131,507.11.
So, if we look at the differences between these we will see that just between Loaner A and Loaner B, which is an interest rate difference of 0.25%, you will save $13,711.10 in interest payments. Then, compare Loaner A to Loaner C and you will see an interest savings of $27,180.86 throughout the loan.
This is the power you can gain by applying and getting preapproved by multiple lenders. If we imagine for a moment that you only applied to one of these loaners there would be no way for you to know if you’ve gotten the best rate or if you could be saving money.
