If you need to use a mortgage loan to finance your home purchase, it would be wise to get pre-approved for a loan before entering the market. There are several reasons for this, and they are explained in detail below.
What Is Mortgage Pre-Approval?
During the mortgage pre-approval process, a mortgage lender will review your financial situation to determine whether or not you're qualified for a loan. If you do appear to be qualified, they'll also give you a maximum amount they are willing to lend you.
You will probably have to fill out a standard mortgage application in order to get pre-approved. The lender will also request certain financial documents for verification purposes. These might include bank statements, tax returns, W-2 forms, and pay stubs.
3 Reasons to Get Pre-Approved
It's a worthwhile process for several reasons. Here are the four main benefits of getting pre-approved for a home loan, before you start shopping for a house.
1. You can identify potential problems early on in the process.
Lenders can uncover a lot of potential problems during the mortgage pre-approval process. Maybe your debt levels are too high in relation to your income. Maybe your credit score is too low. The sooner you can find out about these things, the better. It gives you more time to correct them.
Without this process, you could spend days or weeks shopping for a home only to find out you're not qualified for a loan. That's a waste of time and energy. Identify problems early, and then work on correcting them. This is the sensible approach. It's also one of the key benefits of getting pre-approved.
2. It helps you narrow down the house-hunting process.
Imagine this: You spend three weeks looking at homes in the $300,000 price range. You look at them online and also by driving through neighborhoods. Then you find a house that is perfect for you. So you approach a mortgage lender to apply for a loan. The lender says they're willing to lend you $225,000 -- max. This can't be right, can it?
So you speak to three other lenders, and they all give you similar numbers. You've just wasted a lot of time by shopping in the wrong price range.
This is another area where mortgage pre-approval benefits you, as a home buyer. Granted, your own personal budget is the most important spending limit to keep in mind. But it also helps to know what the lender is willing to lend you. That way, you can limit your house-hunting process to the types of homes you can actually afford to buy.
3. Sellers and their listing agents will take you seriously.
If you try to schedule a showing to see a home, the listing agent will probably ask if you've been pre-approved by a lender (or if you have some other form of financing lined up).
They do this for the same reason we discussed earlier. They would rather deal with buyers who have been pre-approved, because it indicates there's a good chance they'll get financing.
Now imagine a scenario where the seller gets two offers -- one from a buyer who has been pre-approved, and one from a buyer who has not. The second buyer is an unknown variable, where financing is concerned. Which offer do you think the seller would accept? Which one would you accept?
In short, sellers will be more inclined to accept your offer if it has a pre-approval letter attached. This is particularly important in an active real estate market where multiple offers are common.