Why you should get mortgage pre-approval before buying a home

In a competitive real estate market, a mortgage pre-approval letter with your offer can bring you one step closer to your dream home. Obtaining it adds a step to your home buying checklist, but the benefits of being pre-approved for a mortgage makes the time you spend on it worth it.

Continue reading to get a better understanding of the benefits of being pre-approved for a mortgage and learn several tips to bear in mind in the process.

UNDERSTANDING MORTGAGE PRE-APPROVAL

Unlocking the door to your dream home begins at the very first step of the home buying process: preparation. In this stage, you will be assessing your financial capabilities, examining your motivations, and identifying potential communities to live in.

Most importantly, you will be choosing a loan type and your preferred lender or bank should you decide to get financing for your home purchase. You can choose to expand this step by securing mortgage pre-approval letters once you have narrowed down your options. While this is done in the initial stages of the home buying process, it can significantly affect the success of your real estate investment.

What is mortgage pre-approval?

Mortgage pre-approval is a thorough evaluation by a lender to determine how much you can borrow. This process involves a detailed examination of your financial details, including income, credit score, assets, and debts. The lender will verify your documentation, such as pay stubs, bank statements, and tax returns.

Once you complete it, you will receive a pre-approval letter specifying the loan amount you qualify for. This piece of document can be valid for 60 to 90 days and may be renewed or reissued depending on your bank or lender.

The process for obtaining mortgage pre-approval looks like this:

1. Application submission: Submit a detailed mortgage application, together with necessary documents such as income proof, credit reports, and bank statements to your chosen lender or bank.
2. Document verification: The lender or bank will conduct a series of steps to ascertain the veracity of the information presented in your application.
3. Credit check: The lender or bank will conduct a hard credit inquiry to assess your creditworthiness.
4. Review: The lender or bank will review all the information and determine the loan amount you can be approved for.
5. Release of pre-approval letter: If successful, the lender or bank will issue a pre-approval letter that specifies the loan types you qualify for and the range you can borrow should you proceed with your mortgage application.

What is the difference between pre-approval and pre-qualification?

Mortgage pre-qualification is a preliminary step where a lender provides an estimate of how much you can borrow according to your self-reported financial information. This process is less rigorous and does not require document verification or a hard credit check. It typically involves a quick online or phone interview where you give your basic information about your income, debts, and assets.

• Depth of evaluation: For pre-qualification, it is all based on unverified, self-reported information. In comparison, pre-approval is based on verified documentation and a thorough credit check.
• Timeframe: Pre-qualification can be completed in a few minutes to a day, while pre-approval can take several days to a week due to detailed review processes.
• Impact on credit: Pre-qualification usually involves a soft credit inquiry with no impact on your credit score. Pre-approval involves a hard credit inquiry, which may temporarily affect your credit score.
• Usefulness in the buying Process: Pre-qualification provides a general idea of your budget and is useful for early-stage planning. On the other hand, pre-approval offers a specific loan amount and makes you a more attractive buyer to sellers.

Whether you opt for a pre-qualification or pre-approval depends on your stage in the homebuying process. Getting pre-qualified will help you understand your borrowing capacity and set your budget early on in the process. Pre-approval does the same, only it has the additional benefits of strengthening your offer and making you a more credible buyer in the eyes of sellers.

FIVE IMPORTANT BENEFITS OF BEING PRE-APPROVED FOR MORTGAGE

Since obtaining mortgage pre-approval involves vetting by your chosen lender or bank, a pre-approval letter elevates your status as a homebuyer for many sellers. Moreover, it can streamline your homebuying experience. Here are five reasons why:

1. It helps solidify your financial standing

   One of the primary benefits of mortgage pre-approval is that it provides a clear and realistic picture of your financial capacity as a home buyer. With this knowledge, you can effectively identify neighborhoods or markets as well as properties that fit your budget.

   But mortgage pre-approval has a more personal use as well. It can provide you with a closer look into your financial health since lenders will scrutinize your credit score, income, employment history, and debts. You may uncover issues you are unaware of, such as errors on your credit report or spending habits that need adjusting. This insight allows you to make more informed financial decisions going forward.

2. It strengthens your offer in a competitive real estate market

   With a pre-approval letter in your hand, sellers know that you are a serious and financially capable buyer. This reassures sellers that your financing is likely to go through without any hitches, making your offer more attractive compared to others who might not have taken this step.

   In a bidding war, buyers with mortgage pre-approval are generally seen as more competitive. Sellers know that a pre-approved buyer is less likely to back out due to financing issues. This gives your offer an edge, even if it isn’t the highest bid. Some sellers may even accept a slightly lower offer if it comes with the assurance of pre-approval as it minimizes the risk of their deal falling through.

   Sellers can also enjoy smoother and more straightforward negotiations with pre-approved buyers. Sellers know that you have already met certain lending requirements, simplifying discussions around terms and conditions. This can be particularly advantageous in a fast-paced market where time is of the essence.

3. It helps speed up the homebuying process

   House hunting can take anywhere between six months to a full year without proper research and preparation. To help shorten the experience, it is recommended to complete your pre-approval processes. With it, you can narrow down your search to properties within your price range. Doing so prevents you from wasting any more time on homes that are over your budget.

   Moreover, with a pre-approval letter in hand, sellers are highly likely to prioritize your offer. This will cut down the time it takes to wait for the seller to answer back to you and for negotiations.

   Since most of the financial groundwork is already laid during the pre-approval process, the lender has the necessary documents and has already assessed your financial stability. This significantly reduces the time it takes to get the final approval and closing on the property you want.

4. It identifies potential financial hurdles early

   Obtaining a mortgage pre-approval can help you uncover any potential financial hurdle early on. This foresight can save time, reduce stress, and allow you to fix any issues if you have them. Here are some financial hurdles that you have to be wary of:

   • Credit issues: During pre-approval, lenders scrutinize your credit report. This review can reveal issues such as low credit scores, missed payments, or high credit balances. Identifying these problems early gives you time to improve your credit score by paying outstanding debt, correcting errors on your report, or establishing a history of on-time payments.
   • Debt-to-income ratio (DTI): Lenders typically prefer a DTI of 36% or lower, including your mortgage payments. A high DTI can signal to lenders that you struggle to manage additional debt. If your DTI is too high, you can work on reducing existing debts or increasing your income before applying for a mortgage.
   • Income verification: Pre-approval requires documentation of your income. This can uncover inconsistencies or issues like unstable employment history or unverifiable income sources. Ensuring you have a steady, documentable income can prevent these hurdles. Consider making it a habit to gather and organize your pay stubs, tax returns, and employment verification letters.
   • Asset verification: Lenders will also verify your assets, including savings and investment accounts, to ensure you have enough funds for a down payment and closing costs. Discrepancies or lack of funds can be a red flag to sellers. So build up your savings and ensure that all accounts are properly documented to help mitigate these issues.

5. It prepares you for a smooth transaction

   A mortgage pre-approval ensures that your home-buying aspirations are grounded in financial reality. This alignment between your dreams and financial capacity is essential for making more informed decisions and avoiding overextending yourself financially.

   Also, previously discussed, the pre-approval process can uncover areas of your financial profile that may need improvement. This preparation improves your chances of securing more favorable loan terms and enhances your overall financial health. It also helps streamline the home-buying process since you no longer have to address financial issues upfront.

HOW TO MAINTAIN YOUR PRE-APPROVAL STATUS

Maintaining your pre-approval status until you close on your new home requires careful financial management and awareness of potential pitfalls. Here are some key tips to help you stay pre-approved and smoothly transition to full loan approval:

1. Avoid incurring new debt

   Lenders access your DTI during the pre-approval process, so taking on new debt can alter this ratio unfavorably. This includes not opening new credit cards, taking out personal loans, or making large purchases on existing credit accounts. Even financing a new car or furniture can jeopardize your pre-approval status.

2. Keep your credit score stable

   To maintain your pre-approval status, ensure you continue to make all payments on time, keep credit card balances low, and avoid any actions that could lead to hard inquiries on your credit report. A drop in your credit score could lead to higher interest rates or even denial of your final loan approval.

3. Maintain financial stability

   Lenders tend to re-evaluate your financial status before finalizing your loan, so any significant changes can be a problem. This includes avoiding large, unexplained deposits or withdrawals from your bank accounts. Such transactions can raise red flags for lenders, suggesting financial instability or undisclosed debts. If large transactions are needed, be sure to keep detailed records and documentation to explain them.

   Lenders prefer borrowers with steady employment and consistent income. Avoid changing jobs during the home-buying process. If a job change is unavoidable, ensure it’s a move to a similar or higher-paying position and be prepared to provide detailed explanations to your lender.

4. Communicate with your lender

   Open communication with your lender is crucial throughout the pre-approval period. Inform them of any significant financial changes, like bonuses, large gifts, or changes in employment. Keeping your lender updated can help mitigate potential issues and ensure there are no surprises when it’s time to finalize your loan.

5. Renew your pre-approval if necessary

   Mortgage pre-approvals typically only last between 60 to 90 days. If you don’t find a home within this period, you may need to renew your pre-approval. This process usually involves re-submitting financial documents and undergoing another credit check to confirm that your financial situation hasn’t changed. Staying proactive about the renewal process can help avoid any lapses in your pre-approval status.

COMMON MISCONCEPTIONS ABOUT MORTGAGE PRE-APPROVAL

By now, we have established the importance of mortgage pre-approval and its myriad benefits to your homebuying experience. Now, let us walk you through some common myths about mortgage pre-approval and the truths about them.

1. Mortgage pre-approval promises an approved loan

   Many homebuyers believe that being pre-approved means they are guaranteed a mortgage. Pre-approval, however, is not a final loan commitment. It is a conditional offer based on the financial information available at the time.

   Final approval depends on factors such as a stable financial status, a satisfactory home appraisal, and meeting certain loan requirements. Any significant changes in your financial situation or issues with the property can still result in a loan denial.

2. Mortgage pre-approval harms your credit score

   A common worry is that pre-approval will significantly damage your credit score. Most lenders conduct a soft credit inquiry during pre-qualification, which does not affect your credit score. For pre-approvals, even when a hard inquiry is performed, its impact is minimal unless multiple inquiries are made in a short timeframe.

3. The pre-approval amount is your spending limit

   Some homebuyers assume that the pre-approved amount is the exact budget they should spend on a home. However, this figure represents the maximum amount a lender is willing to offer, not necessarily what you should spend. After all, you need to consider other financial commitments, like property taxes, insurance, maintenance, and your personal financial goals when setting your budget.

4. Perfect credit is necessary for pre-approval

   It is a myth that only those with perfect credit scores can get pre-approved for a mortgage. While a higher credit score can secure better loan terms and interest rates, various loan programs (e.g. FHA, VA, and USDA) are available for those with lower credit scores.

5. Pre-approval is expensive

   Numerous lenders offer free pre-approval services, though some may charge an application fee if you proceed to the full loan application. It’s best to clarify with your lender about any potential fees during the pre-approval process.

6. Pre-approval is valid indefinitely

   Pre-approval letters have an expiration period of 2 to 3 months. This is because financial situations and market conditions can change quickly. So, keep your pre-approval updated when you’re always ready to make an offer on a home.

In summary, being pre-approved for a mortgage before house hunting is a strategic move that can set you up for success. You gain a clear understanding of your budget but also present yourself as a serious buyer to sellers. This competitive edge can significantly speed up the homebuying process, allowing you to act quickly and confidently when you find your dream home.

NAVIGATE PHOENIXVILLE, PA REAL ESTATE WITH A LOCAL EXPERT

Marie DeZarate, with her extensive experience and track record, is an expert in guiding clients through the complexities of home buying. Her deep market knowledge of Chester and Montgomery counties makes her and her team an invaluable partner in your home-buying journey.

If you’re ready to take the next step in your homeownership journey, reach out to the DeZarate Real Estate Sales Group today. Give them a call at 484.881.2397 or fill up this form.