3 Important Reasons Why You Should Get Pre-Approved for a Mortgage Before Starting to Shop for Homes in 2021
Starting the home buying process is an exciting time and many buyers want to jump right in and start searching. While shopping for homes is an incredibly fun part of the process, starting the search first has the potential to be a waste of time and energy.
As a REALTOR® having a license in Texas, California and Ohio, I have worked with many buyers who feel overwhelmed by the process and unsure when is the best time to obtain a pre-approval from a mortgage lender.
In this guide, I will be explaining what a pre-approval is, three reasons why you should get pre-approved before you start looking for the home of your dreams, and how to get pre-approved for a mortgage.
What Is a Mortgage Pre-Approval?
Unless paying for a home in cash, most buyers need to obtain a mortgage loan to purchase a home. A pre-approval is a preliminary evaluation of a person’s ability to qualify for a mortgage loan. A lender looks at a potential borrower’s work history, income, expenses and credit worthiness to determine if a person qualifies to be pre-approved for a mortgage.
The potential borrower will also complete a loan application and submit any documentation to the lender for verification of employment, income, expenses and assets. If the applicant is pre-approved, the lender will issue a pre-approval letter.
Here are 3 important reasons why getting a pre-approval in the beginning is important:
Reason #1: You Will Know if You Are Ready to Purchase a Home
Making sure that you are ready from both a financial and credit perspective is super important to know right from the start. If you are ready, you will be issued a pre-approval letter and can start shopping immediately.
If you are not ready, it will help you learn what steps you need to take to become eligible for a pre-approval. The last thing you want to do is to spend time searching and falling in love with a home to later find out you cannot get pre-approved.
Reason #2: It Will Help You Understand Your Purchasing Power
Knowing how much you qualify for in a mortgage loan will let you know the price range you should be shopping within. Without the pre-approval, you could be looking at homes that are priced higher than the loan amount you would be pre-approved for.
As a result, you may fall in love with homes that are outside your budget. The opposite is also true. If you are unaware of your pre-approval amount, you might be shopping in a lower price point and are potentially missing out on all the other home options that are available to you at the higher price range.
So, whether you are shopping in a price range too high or too low, either way you may be wasting your time and energy. In addition to the above, it is important to note that many people can afford a larger mortgage than they are comfortable actually paying.
Just because you have been approved for a certain dollar amount does not mean that you are comfortable with making the monthly payment associated with such amount. So, for example, maybe you are pre-approved for a $300,000 home and it would bring you to a total payment (including taxes and insurance) of $1,500/month.
However, you do not want a monthly payment greater than $1,250. The lender can work backwards from that $1,250 to give you the home price range you should stay within when shopping for a home.
Reason #3: You Need the Pre-approval Letter When You Make an Offer on a Home
Once you find a home you love, the next logical step is to make an offer. Most sellers want to see the pre-approval letter attached to your offer. This becomes especially important in a seller’s market where there is limited inventory and lots of buyers.
In this competitive environment, getting an offer in quickly is of paramount importance. So, the last thing you want to do is risk losing the home of your dreams to another because you still need to go a lender and get pre-approved. If you are not ready, another buyer may be.
How to Get Pre-approved for a Mortgage?
If you are working with a REALTOR®, your real estate agent is a great source for lenders to consider. If you are not, there are many types of lenders that you can choose to apply with, such as banks, credit unions, mortgage brokers, direct lenders, etc. It is a good idea to shop around and see which lender offers you the best deal.
Note: It is best to shop within the same 2 weeks to avoid having multiple inquiries on your credit report. If you shop within the same time period, the credit bureaus will most likely consider all these inquiries as one inquiry since it is evident that you are shopping lenders/rates.
Once you decide who you want to apply with, as a potential borrower, you must complete an official mortgage application, as well as, submit to the lender any necessary documentation required to perform the credit and financial analysis.
During the pre-approval process, the lender will run your credit and ask you about your income and expenses and other qualifying questions. Once the lender receives your credit reports/scores, reviews all your documentation and runs all the numbers (including debt-to-income ratios), you will learn whether or not you qualify for a pre-approval.
Once pre-approved, the lender will issue a pre-approval letter typically with a specific amount for which you have been approved up to. Also, at this time, you will have a better idea of the interest rate to expect.
However, this rate is subject to change up until the rate becomes fixed and/or the loan closes. This is also a great opportunity to understand what your monthly payment might be by using that day’s interest rate and a specific purchase price.
Getting pre-approved before shopping for homes is extremely important. Utilize your real estate agent to help connect you with mortgage lenders in your area and to help guide you through this process.
By getting your pre-approval first you will know if you are ready to buy a home, know the amount that you are approved for, and last but not least, you will be ready to act quickly with an offer when you find a home that you love!