You’ve likely heard by now that you should get pre-approved before buying a home, but you probably wonder why. You know how much you can afford, why can’t you look at homes when you’re ready and then get a mortgage?
What is a Pre-Approval?
A mortgage pre-approval is a conditional approval letting sellers and real estate agents know you’re a serious buyer. Without the pre-approval, you could be a nosy neighbor or someone who thinks they can buy a home but no bank will finance.
The single piece of paper showing you’re pre-approved for a specific loan amount and specific terms is the most important thing you can have when looking at homes.
How Does it Work?
Getting pre-approved is simple. It starts with a loan application, approval to pull your credit, and you supplying your documentation including paystubs, W-2s, bank statements, and any other important documents regarding your financial situation.
An underwriter will review your documentation and decide if you qualify for the loan. If they approve you, they’ll write a pre-approval letter showing how much you can borrow, how much you’ll put down, and the terms of the loan.
The letter will also include the conditions you must satisfy to close on your financing. Sometimes it’s simple conditions like updating your employment verification or checking your credit again. Other times, it includes tougher conditions you must clear before you can close.
The letter ensures everyone is on the same page, understanding how close (or far) you are from a final approval and what it will take to get there.
Why is it Important?
The pre-approval isn’t a guarantee of approval, but it’s a step in the right direction. Sellers and real estate agents prefer them because they know you’re a serious buyer and they can accept a bid from you. Without the letter, they don’t know if you qualify for financing so they’d take a big chance accepting your bid.
The pre-approval letter ensures sellers they won’t end up back at square one after wasting time accepting your bid and going through the process of waiting for the closing only to discover that you don’t qualify and they have to list the home again.
Get Pre-Approved Before Buying a Home
We always recommend getting pre-approved for you even look at homes. Why waste anyone’s time looking at homes you can’t afford. The payment you think you can afford and what a lender thinks may be two different things.
Taking the few minutes to get pre-approved and get a true picture of what you can afford and what it will cost will ease everyone’s stress. You’ll know what a loan will cost you monthly and over the life of the loan and sellers will know you are a good candidate for financing.
Sellers use this information when choosing whose bid they will accept. In today’s seller’s market, it’s important to have the pre-approval so you stand out from the other buyers trying to buy the home too.
Written By The Mortgage Loan Center.