Are you thinking of buying a home sometime soon? If so, searching through listings isn't the first thing you should do. In fact, there's something even more pressing that should be done even before you start pounding the pavement in search of a home: starting the mortgage pre-approval process.
A mortgage pre-approval certainly isn't mandatory, but it can definitely give you a leg up in a real estate deal and can help you keep your search focused on properties that match your budget. Becoming prequalified for a home loan shows buyers that you're serious about your purchase and can save you time during the negotiation stage.
What is a Mortgage Pre-Approval?
It's important to understand that a pre-approval is not the same as a regular approval. Just because a lender has issued a pre-approval does not mean final mortgage approval will be granted once your offer on a home has been accepted. A pre-approval is simply an assessment of your finances that determines whether or not you would be eligible for a mortgage.
Your credit will be checked and your employment information and financial status will be verified to help identify whether you would be able to qualify for a mortgage. A pre-approval also provides a rough estimate of the purchase price you would be able to afford based on your income and assets.
NOTE: Getting pre-approved is NOT the same as becoming pre-qualified. Many first-time home buyers run into this mistake. Pre-qualification is the general idea of how much you can afford based off of the information you share with the mortgage company. The pre-approval process is much more in depth and requires an official mortgage application.
Why Should You Get a Mortgage Pre-Approval?
There are a few important reasons why you should take the time to apply for a mortgage pre-approval before you begin your home search.
You'll know what you can afford in a home purchase.
A good reason to get pre-approved is to help you identify what you can afford. There is no sense in looking at homes that fall in the $800,000 range, for instance, if you are only able to realistically afford a home worth no more than $500,000. Many buyers are not aware of what they can afford.
A mortgage pre-approval will tell you what price point you should be looking at. Knowing what you can afford will help you narrow your focus throughout your home search so you're not looking at properties that are financially out of your reach. This can help avoid wasting any time and prevent any disappointments.
You can lock in your interest rate.
Mortgage interest rates have been hovering near historic lows for many years now since the housing crisis back in 2008. But rates are now starting to creep back up, albeit very slowly. That said, pre-approval will give you the opportunity to lock into a specific mortgage rate, especially if you believe rates are on the rise.
If your lender offers a rate lock on pre-approved mortgages, you won't have to worry about getting stuck with a higher rate if the market fluctuates. These rate locks are typically good for anywhere between 60 to 120 days, after which the promise of a specific rate disappears.
You'll appear more favorably in the eyes of sellers.
If you go into an offer situation with a pre-approval letter in hand, sellers will feel more comfortable knowing that you can afford to buy their home. It's not uncommon for sellers to accept an offer from buyers who wind up being unable to secure financing.
Sellers prefer to work with qualified buyers, and those who go into a real estate deal armed with a mortgage pre-approval are typically preferred by sellers over those who don't. This can be especially helpful in a hot seller's market where competition among buyers is fierce. In this case, buyers need to do what they can to stand out, and being pre-approved for a mortgage is one of them.
Closing will move along faster.
Since most of your credit and financial checks are done when you are pre-approved, a lot of time can be saved after your offer has been accepted. With all that information in hand (assuming no changes in income or finances have occurred), the lender can order the appraisal and issue you a mortgage approval without having to go through all the lengthy paperwork that was already taken care of during the pre-approval process.
You'll be clear on all the closing costs associated with buying a home.
Getting pre-approved for a mortgage will give you a detailed picture of all the costs you'll be obligated to cover when you close on a home purchase. There are other expenses to pay aside from the down payment and home inspection. A pre-approval will provide you with a solid understanding of how much it will truly cost you to buy a home so you can budget accordingly.
What's Involved in the Mortgage Pre-Approval Process?
While a pre-approval is not as involved and complex as final mortgage approval, it can still be quite intricate. At this stage, you'll be asked to fill out and submit a mortgage application along with an application fee. You will also be required to provide several documents, including:
- Proof of income and employment verification: Documents that prove your income include pay stubs, W-2 statements, tax returns, and an employment letter.
- Asset statements: Any statements that prove your assets will need to be provided, such as investment account information or bank statements.
- Credit check: The lender will perform a check to see what your financial history is like. This will provide the lender with enough information to assess your eligibility for a mortgage and how much you would be approved for.
There are clear benefits to getting pre-approved for a mortgage. There's little reason not to get pre-approved. After all, the mortgage application process will have to begin at some point, and getting pre-approved today can get a big part of the approval process out of the way. With a pre-approval, you can house hunt with more confidence and save time when you finally find your dream home.