The Importance of Pre-Approval

Most buyers are familiar with the term, “pre-approval” or “pre-qualification” in the home buying process. But in today’s competitive market, pre-approval is not only a “nice-to-have” option, it is often a prerequisite for submitting an offer and sometimes even for viewing a home. What is a pre-qualification or pre-approval letter and why is it so important? What is the difference?

The main difference is that pre-qualification can often be self-reported. Mortgage pre-approval, however, usually requires documentation and verification of income, assets, and debts. Pre-approval will often require a credit check. The best way to know which one you require is to ask your real estate agent.

Getting pre-approval saves time. The process, while it can be a bit of a project, helps estimate the loan amount that you are likely to qualify for. This in turn helps you start your home search by looking only at homes that you know will fit your budget. It also prevents the frustration of finding out that the house you wanted to buy is actually out of your budget.

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.”

In the current market, it behooves buyers to get a pre-approval letter. Before a pre-approval letter can be written, mortgage lenders require:

  • Proof of income
  • Proof of assets
  • Good credit
  • Employment Verification
  • Other Documentation – specific to the lender
  • ID Documentation such as driver’s license and Social Security number

Pre-approval shows sellers you’re a serious buyer. In today’s market, many sellers will require a pre-approval letter when submitting an offer (unless you are paying cash, in which case sellers usually require proof of funds (POF)). If it’s not required, a pre-approval letter may help your offer stand out from other offers— a big advantage in this competitive market. Once complete, the approval usually lasts for a particular period, such as 60 to 90 days.

If you work on your pre-approval requirements and find that your credit score is less than desirable, most mortgage lenders can advise on ways to improve your score. Keep in mind that you are not obliged to work with the lender who pre-approved you; you should always shop around when applying for a mortgage. Also note that getting pre-approved for a mortgage loan is not a guarantee. It does not obligate the lender in any way. You’ll face a secondary review process later on, in order to get your final approval. There’s a lot more underwriting involved with the final approval, including the appraisal process.

Consulting with a lender before the homebuying process can save heartache and headaches later. Gather paperwork before the pre-approval appointment (even if by phone), and definitely before you go house hunting!