If you’re soon to be undertaking the process of buying a home, then there’s a strong chance at least someone has suggested that you get a mortgage pre-approval. And as it turns out, there are a lot of good reasons as to why you should do so.
A mortgage pre-approval is a statement from a lender that says you are qualified to borrow up to a certain amount. It also includes a specific pre-approved interest rate, though this number can change depending on how soon you put in an offer on a home since mortgage rates are variable. To come up with the promised loan amount, lenders take into consideration the same factors they would consider for a traditional mortgage approval, including your debt to income ratio and your credit score. The better your financial situation looks, the more you’ll be pre-approved to borrow.
So why is that piece of paper so key? In this article, we’ll go over four of the biggest reasons why getting a mortgage pre-approval is important for buyers.
It Lets You Know What You’re Working With
There is so much to consider when you’re looking to purchase a new home. From what location you want to live in to what your must-haves are in a house (and alternately, your deal-breakers), you need to juggle a lot of different needs in order to end up with the best home for you and your family. And one of the biggest needs to juggle is going to be cost.
Buying a home is a major investment, and most of us aren’t paying for the whole thing up front in cash. When you get a mortgage pre-approval, you’re able to set your budgetary limits and make sure that any home you’re looking at is a home that you will be able to finance.
It Makes You a More Attractive Buyer
There are two types of markets: buyer’s markets and seller’s markets. In a buyer’s market, inventory is high and demand is low and you have a lot more lee-way in terms of the purchasing process. In a seller’s market, however, inventory is low and demand is high, and buyers need any advantage they can get on their side if they want to eke out the competition.
Most markets go back and forth between these two varieties season to season and/or year to year. And if you’re looking to buy in a seller’s market, then one of the advantages that you’re definitely going to want is a mortgage pre-approval.
Consider this: if there are two buyers making an asking price offer on a home and only one has a mortgage pre-approval, who do you think the seller is going to be more likely to go with? In almost all cases it’s going to be the buyer with a pre-approval, since there’s a lot less risk to the seller of the deal falling through due to lack of appropriate financing.
It Gives You More Room to Negotiate
In addition to making you a more attractive buyer, a mortgage pre-approval also lends you some flexibility in terms of bargaining and negotiations. That’s because sellers who know that a buyer is already qualified for the offer amount may be more likely to make some compromises if it means the sale is a sure thing.
If you want some repairs or improvements thrown in or if you want the seller to cover your closing costs or purchase a home warranty for you, your mortgage pre-approval will help strengthen your position and may make it more likely that you get what you’re asking for.
You’ll Close Faster
On average, it takes about 50 days to close on a house. The delay is due to quite a few different things, and that includes mortgage approvals. If you’ve already got your pre-approval in hand, you’ll be able to speed up the process so you can move in to your new home earlier than you might have been able to otherwise.
Securing financing is the first thing that happens when you start to close on a home. With a mortgage pre-approval, financing is already secured and you can jump right to the next steps, such as your appraisal and inspection. This is a particularly beneficial advantage if the seller is also trying to close sooner rather than later.
How to Get a Mortgage Pre-Approval
Start by determining who you want your lender to be. You can get a mortgage pre-approval from up to three different potential lenders, and it’s a good idea to do so, since it will allow you to compare rates and select the option with the most optimal lending terms.
In order to provide you with a pre-approval, each lender will need some specific information in regards to your finances:
- Personal information. Have your social security number ready, as well as proof of identity. Lenders will use this information to run a credit check. If you’ve recently changed your name, you’ll want to supplement your proof of identity with additional proof, such as a marriage license or divorce certificate. The credit check is necessary, since it will give lenders insight into your debt to income ratio, as well as your financial history.
- Income information. Lenders are going to need proof of your income for the past two years, including all W-2s and/or alternate tax information, pay stubs, and information related to other sources of income that you may have.
- Asset information. Finally, you’ll need to provide any documentation related to assets outside of your income, including any large monetary gifts or investments. You may be required to provide a letter from anyone who is gifting you with substantial funds to put toward the purchase of your home.
Have this information ready to go ahead of time so that your mortgage pre-approval process goes as smoothly and quickly as possible. Once a lender has all of the documentation that they need, your application will go to an underwriter who will determine how large of a mortgage you qualify for. Altogether, the process can take anywhere from a few days to a few weeks, depending on who you’re working with.
A mortgage pre-approval is usually valid for anywhere from 60 to 90 days. For many buyers, this is enough time in which to search for and make an offer on a home. If you do happen to extend the buying process beyond the pre-approval period however, you’ll need to speak with your lender and find out what you need to do to reapply.
As a general rule of thumb, don’t make any big changes to your finances in between getting your mortgage pre-approval and buying your new home. Making another major purchase or taking on alternate debt will likely invalidate your existing pre-approval amount and require you to start over.
Putting Your Mortgage Pre-Approval in Context
As always, context matters. Keep in mind that just because you’re pre-approved to borrow up to a certain amount doesn’t mean that you should borrow that amount. Homeowners buying more home than they could afford—and banks letting them—was one of the major drivers of the 2008 housing crisis and resulted in many families losing homes that were backed with unsustainable mortgages.
Work with your realtor and/or a financial advisor to set your budget within the confines of your mortgage pre-approval. Our mortgage affordability calculator is also a great place to start. Often, your best bet will be to take out less than the bank has promised you.
