While many buyers are aware that a mortgage pre-approval letter increases their buying confidence and power, most may not understand exactly why pre-approval is so important. Why should you jump through the application hoops before even beginning your home search?
First, you'll know exactly how much loan you can afford, making your initial home search much easier. Why waste your time looking at homes either out of your reach or well below your financial grasp? I remember when my husband and I started looking for our first home and picked a price range we thought we could afford. However, after we found a more expensive house, we discovered in the pre-approval process that the range we had been looking in was limiting our choices, and once we raised our sights, we found the perfect house. At first, those payments may seem overwhelming, but when you realize you can write off all the interest and property taxes from your tax return, it all becomes fathomable.
Notice that the topic of this column is "pre-approval," and not "pre-qualification." What's the difference? Pre-qualification is easy - you provide basic information to a lender, and in a few short minutes, you have an answer. Pre-approval requires strict verification of documentation relating to your employment, credit history, sources of income, etc. It takes more time, but is more accurate and carries more weight. The timeframe for buyers to get approved when submitting a purchase contract is seven days after acceptance, but if you start the process ahead of time, you'll be way ahead of the deadline!
Pre-approved buyers stand on solid negotiating ground with sellers. Sellers working with well-qualified buyers are more likely to accept the offer and less likely to stall on terms and conditions. Experienced real estate agents know the difference and will advise the seller on the advantages of a pre-approved buyer versus a pre-qualified buyer.
Understand that pre-approval is not binding, and is still subject to a satisfactory appraisal on the prospective purchase. If your financial situation changes, interest rates rise or fall, or the deadline passes, a recalculation will be necessary; but a little legwork now will pay off handsomely as you approach the finish line on your contract.