You are ready to buy a home, so you think you should jump right in and start the home search. We hate to burst your bubble, but there is one step you should take before you shop for a home.
You need to get pre-approved for a mortgage. How else would you know how much home you can afford? If you don’t have the financing, you can’t buy a home. That’s why it makes sense to get that pre-approval long before you ever look for a realtor to find you the perfect home.
What is a Mortgage Pre-Approval?
The mortgage pre-approval is the lender’s approval of the information you have provided thus far. It lets sellers know that a lender has good intentions to provide you with the financing for a home, as long as the home passes the appraisal and a few other minor conditions are satisfied.
In order to get a pre-approval, you must complete the loan application and provide the lender with basic documentation for proof of what you state on your application. This usually means allowing the lender to pull your credit, supplying pay stubs and W-2s, and a few months of your bank statements.
With this information, the lender can determine how much loan you can afford and which loan program you qualify for. If you fit the criteria, they will write a letter stating that you are pre-approved for a specific loan amount and a specific loan program. The letter will also state the conditions that the approval is subject to before they can issue the final approval.
Why do Sellers Want a Pre-Approval?
Sellers want nothing more than to see only buyers that have a pre-approval. It shows the sellers that you are not only serious about buying a home, but that you qualify to buy it too. Without that pre-approval letter, how would the lender know that you aren’t just a nosy neighbor from across the subdivision that wants to see your home?
What if the seller accepts your bid and you aren’t capable of buying it? Then the seller wasted the time taking the home off the market while waiting for your financing to go through. Once the seller knows you aren’t going to buy the home, they have to put it back on the market and start back at square one. If they only accept buyers with a pre-approval, they can avoid this risk.
You Want the Pre-Approval Too
The pre-approval is more than just for the seller. It helps you know what to expect too. For example, what if you assume you can afford a $500,000 home and that is the price range that you shop in when looking for a home, but you actually can’t afford that loan? Even if you can afford it, you might find that you don’t qualify for it because your credit isn’t good enough or your debt ratio is too high.
Getting the pre-approval before you shop for a home helps you stay within your budget. You know what size and type of loan a lender will give you. This way you can shop for a home that you can afford. This can help you avoid wasting your time as well as the seller’s time.
Having a pre-approval can help you see how the actual mortgage payment you’ll have will fit into your budget too. Until you know the full cost of a mortgage payment, including the principal, interest, taxes, and insurance, you won’t know how it fits in your budget. Even if a lender says you are approved for a specific loan amount, it doesn’t mean you will be comfortable with the payment yourself. The pre-approval gives you a chance to try the payment on for size to see how it works within your budget before you commit to buying a home.
The pre-approval is an important step in the home buying process. It’s best if you take this step first before any others so that you know exactly where you stand. Shopping for a house before getting the pre-approval is like shopping for groceries before you get paid. Know what you can afford and then shop for a home so that everyone can be on the same page.