A home purchase is a big commitment, but it’s not one that you can make without help. Indeed, before you buy a home, chances are that you will need to find a financial institution willing to lend you the money to make it happen.
But a lender isn’t just going to hand over the money. There is a big risk involved in lending you hundreds of thousands of dollars. What happens if you default? This is why the mortgage pre-approval process is part of the home buying experience.
What is Pre-Approval?
A pre-approval tells you exactly how much a lender is willing to let you borrow. This is an “official” number. It’s important to understand that a pre-approval is different from a pre-qualification. When you are pre-qualified, the lender uses unverified information you provide to give you a ballpark estimate of what you might be able to borrow.
A pre-approval is issued after the lender has pulled your credit, and verified your income through documentation. The pre-approval might be for less than you were pre-qualified for, once all the facts are verified. However, this pre-approval carries more weight, and it provides you with a better idea of what to expect.
Why Pre-Approval is Important
Your mortgage pre-approval is important for two main reasons: You know what you can borrow, and sellers know you are serious.
First of all, your pre-approval gives you a realistic idea of what you can borrow. A pre-qualification can get your hopes up, but a pre-approval is the real deal. You know what the lender will allow when you have a pre-approval. This allows you to make better decisions, and it keeps you from wasting your time looking at homes that you can’t afford. A pre-approval allows you to move through the home buying process more efficiently.
A pre-approval letter also signals to sellers that you are serious. Many sellers (and their real estate agents) won’t entertain an offer from you unless you have a pre-approval letter to accompany that offer. A seller wants to know that you can actually afford the house before starting to negotiate with you. In some cases, you aren’t even allowed to look at the house without proof that you can afford to buy it.
Your mortgage pre-approval is a vital part of buying a home. Use pre-qualification to shop around with different lenders, and choose one that you like. But once you have finished shopping around, and you know which lender you want to use, it’s time to get a pre-approval so that you can move forward with the home buying process.