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Why Every Buyer Needs a Pre-approval Before House Hunting

Unless you are paying cash, mortgage pre-approval is the most important preparatory tool when purchasing a property.

  • Pre-approval informs you of the range of prices you can afford.
  • Realtors and sellers need it to take you seriously.
  • Your mortgage procedure will be more streamlined and expedited.

These benefits should be plenty to convince you. However, 42% of homebuyers browse for a property without a pre-approved mortgage.

John and Linda’s Story

Suppose you disregard this recommendation and engage in virtual tours in a popular market. What if you fell in love on the first day? That might be problematic, as you will only accept your offer once you pay in cash. You may not even be permitted to inspect the property physically.

Just ask John and Linda, two real estate purchasers who learned the hard way.

The first step in John and Linda’s house quest was an online property search.

The couple called a real estate agent to view the homes once they discovered a few they liked. The representative inquired whether they had a pre-approval letter for a mortgage. John and Linda informed their agent that their credit and money were immaculate, that there would be no issues, and that everything was in order.

First, Shop for the Money, Then for Homes

John and Linda were mistaken, unfortunately. Their offer was never made since they could not furnish a pre-approval letter. A pre-approval letter is required in many of today’s hottest real estate markets.

John and Linda learned that their money was not as “immaculate” as they had imagined.

Recently, John made the transition from paid employee to the company owner. This alone can make it challenging to obtain a mortgage, as lenders typically need at least two years of successful self-employment before accepting this income.

In addition, John, like many company owners, deducted a sizeable portion of his gross (pre-tax) income, which is the income most mortgage programs use to establish your affordability.

John and Linda were humiliated and saddened to discover that their purchasing power was only approximately 80% of what they had anticipated. Therefore, it is prudent to shop for money before finding properties.

Sellers Are More Selective Than Ever

It is a hot market virtually everywhere in the country. This implies sellers might be more selective when deciding which offers to accept.

In a seller’s market, inventory is typically limited. Pre-approval provides you with an advantage over your rivals. A mortgage pre-approval enables you to make an offer confidently and demonstrates that you are a serious buyer with the financial wherewithal to acquire the seller’s house.

Many real estate brokers will only allow prospective purchasers to see their listings without a pre-approval letter from a reputable mortgage lender.

What Is a Pre-approval?

A mortgage pre-approval letter from a lender guarantees that you, the seller, and the real estate agent can acquire any house that fulfills the lender’s requirements.

Pre-approval for a mortgage reveals how much you can afford to spend and your monthly payment.

Mortgage pre-approval is more than pre-qualification. Numerous lenders provide “pre-qualification” letters after inquiring about your income, obligations, and assets and sometimes performing a credit check.

While a pre-qualification letter is better than nothing (at least you’ve considered your potential purchase), it cannot compete with a pre-approved buyer’s offer. You must submit a mortgage application and all relevant documentation to obtain a pre-approval. These may consist of, but are not limited to:

  • Paystubs and Forms W-2 (typically two years)
  • Tax returns (typically two years if self-employed or you earn commissions or bonuses)
  • Statements from banking, retirement, and investment accounts (two to 12 months, depending on loan)
  • Financial statements (if self-employed)
  • Explanation letters for credit blemishes
  • If you pay or receive spousal or child support according to divorce rulings

Frequently, one document may prompt a request for more ones. For example, an underwriter may doubt your financial management abilities if your bank statement reveals 15 bounced checks in a single month. It is preferable to tackle these issues before house hunting.

Get a Pre-approval Then Hunt for Rates Later

You are not required to work with the lender whose pre-approval letter you receive.

Get pre-approval from any respectable lender, and have your offer accepted on a home.

From there, submit your mortgage application to a minimum of three, and perhaps many more, lenders. Obtain the best rate possible, provided the lender can close on schedule.

Studies indicate that many homeowners stop looking for mortgages after receiving one quotation. However, according to research conducted by Stanford University, failing to compare quotes from at least three or four mortgage lenders costs purchasers an average of over $2,500 in additional fees for a $200,000 loan.

So, don’t allow mortgage rate browsing to stop you from acquiring a pre-approval letter first. Ultimately, the finest rate in the world is only useful if you can purchase the home.

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