You may have heard that getting pre-approved for a mortgage is important to do in the homebuying process. But why is it so important?
When looking for a home, the temptation to fall in love with a house that’s outside your budget is very real. So, before you start shopping around, it’s helpful to know your price range, and what you are comfortable with for a monthly mortgage payment, and ultimately how much money you can borrow for your loan or if you can actually get a loan.
From what I’ve seen I think many home buyers think being prequalified is the same as being pre-approved but they are different. The difference between the two is when you pre-prequalify for a home loan, you are getting an estimate of what you might be able to borrow, based on information you provide about your finances, usually a soft credit check that won’t affect your credit score.
A Prequalification is also a good opportunity to learn about different mortgage options and work with your lender to identify the right fit for your needs and goals. If you are thinking of buying a home but not fully committed to really start searching it would be good to start talking to lenders and finding out what you can afford and if you can actually get a loan.
The pre-approval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide such as your W2, recent pay stubs, bank statements and tax returns and a hard credit check. If you do get pre-approved, you’ll receive a pre-approval letter, which is an offer to lend you a specific amount, that is only good for 90 days and this is when you should be actively looking at houses.
According to a recent survey from realtor.com, many buyers are making the mistake of skipping the pre-approval step in the homebuying process:
“Of over 2,000 active home shoppers who plan to purchase a home in the next 12 months, only 52% obtained a pre-approval letter before beginning their home search, which means nearly half of home buyers are missing this crucial piece of paperwork.”
This paperwork (the pre-approval letter) shows sellers you’re a qualified buyer, something that can really help you stand out from the crowd in the current ultra-competitive market.
How competitive is today’s market? It is extremely competitive right now among buyers.
With limited inventory, there are many more buyers than sellers right now, and that’s fueling the competition. According to the National Association of Realtors (NAR), homes are receiving an average of 2.9 offers for sellers to negotiate, so bidding wars are heating up.
Pre-approval shows homeowners you’re a serious buyer. It helps you stand out from the crowd if you get into a multiple-offer scenario, and these days, it’s likely. When a seller knows you’re qualified to buy the home, you’re in a better position to potentially win the bidding war and land the home of your dreams.
Danielle Hale, Chief Economist for realtor.com notes:
“For ‘a buyer in a competitive market, it’s typically essential to have pre-approval done in order to submit an offer, so getting it done before you even look at homes is a smart move that will enable a buyer to move fast to put an offer in on the right home.’”
I’ll give you a real life example as to why being pre-approved is so important. This is a very unique situation but when I bought my house as crazy as it sounds I was out on my daily running route and this house I would run by daily I saw a notice on the front door one day stating it was foreclosed. I wasn’t a real estate agent then so I didn’t have any special insider information on the home if that’s what you’re thinking and after doing some research I found out it would be coming on the market in the spring.
So, I knew that I needed to be ready and be in the best position possible when it came onto the market. So I made sure to get pre-approved in advance and when the house came on the market I put the offer in within a matter of a few hours of the home being on the market.
I was able to get my offer accepted because the bank that was dealing with the foreclosure accepted the first offer given since all other offers came in a few days later after the home was put on the market.
Yes I know I had an advantage to the other buyers by knowing the house was foreclosed in advance, but anyone driving by could have figured out the home was a foreclosure too if they stopped and looked. So being Proactive by being pre-approved did help in this case.
In addition, today’s housing market is also changing from moment to moment. Interest rates are low, prices are going up, and lending institutions are regularly updating their standards. You’re going to need guidance to navigate these waters, so it’s important to have a team of professionals (a loan officer and a real estate agent) making sure you take the right steps along the way and can show your qualifications as a buyer at the time you find a home to purchase.
In a competitive market with low inventory, a pre-approval letter is a game-changing piece of the homebuying process. If you’re ready to buy this year, let’s talk before you start searching for a home.