Buying a house can be an intimidating process. Whether it’s your first house, second home, or you have an entire portfolio of properties, it’s a nerve-wracking process with lots of steps and hurdles to clear. Getting pre-approved is one of the first steps – and one that you should definitely take seriously.
What is a Home Loan Pre-Approval?
When it comes to financing the purchase of a home, there are numerous hurdles to clear. One of the first steps is to get a bank or credit union to offer you a loan so that you can proceed to search for and buy a house.
Many people start the loan process with pre-qualification, which is basically an informal evaluation of your finances so that a lender can determine whether or not you’re likely to qualify for a loan (and roughly how much you’ll be able to borrow). But a pre-qualification is based on your own information. There’s very little vetting and the process is often rife with oversights and errors.
A better option than pre-qualification is pre-approval. This is more than just an estimate – it’s an offer by a lender to loan you a specific amount of money at specific terms. The offer typically expires after a certain period of time (such as 90 days).
“With a mortgage pre-approval, a lender pulls your credit report and reviews documents to verify your income, assets and debts,” Hal M. Bundrick, CFP writes. “If you’re confident about your credit and financial readiness to buy a home and you’re ready to start shopping, then you might skip the pre-qualification step and go straight to preapproval.”
A pre-approval doesn’t officially lock you or the lender into anything, but it does create some certainty. After you put in an offer and it gets accepted by a seller, the lender will dig into your finances even further and conduct a meticulous underwriting process. If anything surprising or unknown emerges in this process, they could deny the loan. However, with a good lender who has done proper due diligence during the pre-approval process, this is a rare occurrence.
4 Benefits of Getting Pre-Approved
You might be thinking to yourself, “Why can’t I start the home search process and then get approved after I find a house I like?” Well, that’s a good question – and one that we can answer with a few specific points.
Here are the four major benefits of getting pre-approved early on in the process of buying a house:
- Helps Set Your Budget
A pre-approval helps you set your budget. It lets you know precisely how much the bank will lend you so that you can set your upper limit. However, it’s important to understand that you don’t have to spend every dollar the bank offers.
A lender might approve you for a $200k loan, but you can decide that you only want to take out a loan of $175k. That’s fine. Don’t let the pre-approval amount pressure you into spending more than you originally planned.
- Helps You Get a Serious Agent
Everyone takes you more seriously when you have a pre-approval letter in your hand. In fact, many real estate agents won’t even work with clients who aren’t pre-approved by the bank. (To do so would be foolish on their part, as they could waste lots of time working with a client only to find out they can’t actually buy a house.)
- Adds Weight to Your Offer
When you put in an offer on a home, the seller is going to want to see pre-approval for financing. If you don’t have a pre-approval letter, your chances of getting your offer accepted diminish. Likewise, if you’re up against another offer and you’re the only one who is pre-approved, it gives you some leverage.
- Provides Peace of Mind
All of the perks of pre-approval ultimately culminate in this one benefit: It helps you feel confident and at ease knowing that you’re on the right path towards home ownership.
Start the Home Buying Process
Whether you’re a first-time homebuyer, or you’re looking to sell your current home and buy something new, getting pre-approved is one of the first key steps in the process. Start here and then partner up with an experienced real estate agent who can help you complete the rest of the steps.