Getting pre-approved for a mortgage might entail more work upfront for a potential buyer – it saves time in the long run, during the overall complex process of buying a home. A major benefit of getting pre-approved for a mortgage is that it helps you set a realistic budget on how much house you can afford. This can save a buyer from getting their hopes deflated after they have become emotionally attached to a property, and from taking on more of a financial commitment than they can afford.
The Pre-Approval Process
Mortgage pre-approval is when a lender begins the process of determining whether to extend a home loan, and how much money they are willing to extend. They take a deep dive into your financial past. The criteria they are looking at includes your income, debts, banking activity, credit reports and credit score.
Pre-Approval is actually a more in-depth process then that of being Pre-Qualified (which is a basic overview of a borrower’s chances of getting a loan). Pre-Qualified is typically based on criteria provided by the potential home buyer to a lender. It is often not a realistic picture measuring income to debt ratio and does not entail the scrutiny of financial records that pre-approval requires and affords.
Pre-Approval requires paperwork to back up the lender’s inquiry and allows access into your financial portfolio and credit record. Once a lender decides to pre-approve you for a mortgage, they issue a letter of commitment that typically extends from 90 to 120 days. More and more, real estate professionals and sellers will only accept home offers from prospective buyers who are pre-approved.
Some potential home buyers may try to put off the more formal process of getting pre-approved for a mortgage at the outset of their house hunting journey, because they don’t want to feel rushed. They want to wait until they find the perfect property to bid on. This can lead to disappointment if they are pre-qualified, but not pre-approved. Pre-qualifications can lead to a false sense of approval or realistic budget.
3 Reasons to Get Pre-Approved
What used to be an option is becoming more of a requirement in today’s real estate game.
- Know Where You Stand – getting pre-approved removes any guess work out of the process of wondering if you will be able to secure a mortgage, and the dollar amount of the loan a lender is willing to extend.
- A Competitive Market – many prospective buyers put off the paperwork part of getting a mortgage because they are private, they find it boring or they fear they won’t be successful. But real estate is a competitive market and pre-approval counts.
- Having Your Offer Entertained – more and more brokers will not seriously consider a home offer unless the prospective buyer has a letter of pre-approval from a lender that is certifiable.
