In this article, you will learn why is it important to get pre-approved for a mortgage and dive deeper into the pre-approval process. This article is part of a series ‘All About Mortgages’ that answers questions for those who seek out general knowledge on the subject matter.
If you are interested in buying a new home. It is important to get pre-approved for a mortgage. Why is it important to get pre-approved for a mortgage? In short, obtaining the pre-approval letter saves time, avoids disappointment, improves negotiation power, saves money, attains quicker possession dates, and real estate agents are going to want a pre-approval letter to justify their time in showing the buyer homes. Also, it gives the potential borrower an idea of how much they are pre-qualified to determine what market they belong in.
Real Estate Agents Are There for You
If you are in the market to purchase a home. You can always ask for help from a real estate agent. Real estate agents are there to help their clients to get started with the mortgage application, many times they already have referrals in place to minimize the headache in the home buying process. Real estate brokers devote a lot of time showing their clients’ homes; therefore, they will guide you with the help of the mortgage lender to get you pre-qualified so you can buy a home as painlessly and satisfactory as possible.
Moreover, real estate agents may even deny service until you are pre-approved for a mortgage and the value of what you are prequalified for. Real estate agents typically are paid by commission and they can lose a lot of money and time if a home is not bought or sold. This is why real estate agents may require a pre-approval letter before even getting started. In other words, when the mortgage applicant is pre-approved this shows the seriousness of the new home buyer.
Resource – Mortgages 101
The Pre-approval Process
The pre-approval process in the past, use to be on a verify first, approve the last system. In today’s market, your mortgage application is either approved or denied and verified last. Not long ago, mortgage applications would be sent out to a loan committee where once a week or so, these mortgage bankers would discuss the negative and positive on each mortgage applicant.
First, in the past, before the technology shift, you would gather all necessary documents, tax returns, bank statements, and paystubs. Then you would go meet with your local mortgage loan officer at a local bank. That’s where you would fill out your mortgage application, and the loan officer would go over the documents.
In addition, your credit report would be pulled where it would show your credit score. And based on your debt-to-income ratios, all this would determine further approval or the value of what you would be prequalified for. If there were any discrepancies, for instance, a late payment. The mortgage loan officer may request an “explanation letter.” In many situations, simply stating that “I forgot” would be okay.
However, the mortgage loan officer was looking for patterns in the history of your credit report. The mortgage loan officer would ask for employment history, current job, or any gap in employment. And if there were any, an explanation letter would be requested.
Once all that information is obtained, analyzed, and dealt with. It would finally go to an underwriter for final approval. This pre-approval process simply meant that you were verified first and approved last.
Today, the pre-approval process is now approved first and verify last. Pre-approval simply means that you have a willingness and ability. Willingness and ability are two sides of the same coin. Both are necessary for a pre-approval process. Yes, bank account statements, tax returns, paystubs are all eventually required. But today’s process is more painless. It allows the home buying process to be more efficient. It basically states, ‘we are going to approve you for this amount so you can go out shopping for a home, meanwhile, we will start verifying.’
Many people may have willingness but no ability or only the ability but no willingness. In other words, while many people may have enough funds to afford to make the monthly payments on a mortgage and eventually pay off the loan, they may not have the willingness. And, obviously, many people may have the willingness to make the monthly payments, but they just don’t have the funds.[i]
Why is it Important to Get Pre-Approved for a Mortgage?
As mentioned above, pre-approved mortgages are offered by many financial lenders. If you are interested in getting a pre-approved mortgage, we encourage you to start immediately. As with all other loans, it will turn out that it may take some time before you are approved for a mortgage, even for a pre-approval. You will need to carefully check your credit history and current financial situation.
Looking for a home? Here are some important reasons; why is it important to get pre-approved for a mortgage, first?
A Mortgage Pre-Approval Will Save You Time!
By getting pre-approved for a mortgage, you will know exactly how much credit you will be able to borrow. After obtaining this information, you must provide it to the real estate agent. Your real estate broker will only let you examine the houses that you can realistically afford! This may seem obvious, but it does not make sense to spend your precious time viewing homes that do not fit in your price range. By getting pre-approved, you will not waste time!
Avoid Disappointment – Get a Mortgage Pre-Approval!
Getting a pre-approved mortgage will help you avoid disappointments. Not only will you not waste your time viewing homes you cannot afford, but you could end up loving one of them. Can you imagine the frustration that may happen if you discover that your dream home that you had just viewed is not within your financial affordability? That’s why you need to get a pre-approval, so you have 100% confidence in what you can afford, before even viewing a home! It is really painful to know that the only thing that comes between you and the home of your dreams is the lender, which dictates how much credit they are willing to give based on your qualification. To avoid this unnecessary pain, first, obtain the first consent. That way you will not see a home that you do not qualify for. In this way, you view only homes that you have the potential of owning. By this, you are on the road to reality. It gives you peace of mind that you qualify for this amount. It also prepares you for your future financial obligations, by this, you can start to calculate how much your monthly payment can be.
A Mortgage Pre-Approval Increases Your Negotiating Power!
Another benefit of mortgage pre-approval is the negotiation position that you obtain, which may result in potential money savings. In the real estate market, many of the best properties often attract many offers. Many sellers are starting to not even consider a buyer without a pre-approval letter. This is where you gain a slight competitive advantage. If you approach the seller with a declaration of the pre-approval letter, this is saying, “I’m a serious buyer.” The seller will be more willing to accept your offer, even if the offer is slightly lower than the others. Because your offer will not be dependent on future financing (you are pre-approved). Unless competitive offers are supported by previous approvals, you will be in a better position to negotiate on a better buying price and you can save money! With confidence in this financial security, you can also ensure the comfort and confidence of the seller. Sellers are more likely to accept the offer immediately from a pre-approved buyer, even if the offer is lower than the asking price.
A Mortgage Pre-Approval Could Save You Money!
In addition to saving money when buying a home, getting a preliminary agreement on a mortgage can also save money on a future loan. The advance consent closes the interest rate for a certain period (often around 6 months), which can save huge amounts of money. For example, if you bought a home three months after receiving prior approval, then your mortgage interest rate has increased, you will get a loan at a lower price. Earlier consent ensures that the original interest rate is lower, and if the interest rate falls during this time, you will simply get the best interest rate on the loan.
Your Realtor Prefers You get a Mortgage Pre-Approval
As previously mentioned earlier in this article. Another reason why you should get a pre-approved mortgage loan is the difficulty in finding a mediator working with you. If you do not have a pre-approved mortgage, you and the real estate agent can waste time on viewing or offering offers on homes that you cannot even afford.
Resource – Mortgages For Dummies
A Mortgage Pre-approval Allows for Quicker Possession Dates
Because you do not need additional time to organize the application process, the lender can speed up the process. Remember that prior consent means that you are personally entitled to the loan amount, but your funding is not complete. In the last step, the lender must show that the chosen home is equal to the amount of money you will receive. An assessment will probably be needed. When a lender agrees to a loan in advance, the closing period can be halved. Sellers gladly accept offers that seem short to clear the situation. Since the period of applying for a mortgage is periodic, obtaining the initial acceptance of a mortgage, the lender can speed up the entire procedure. Evaluation can be made immediately. It is even possible to shorten the period of 30 days to two or three weeks, especially in cases where the seller wants to liquidate his assets immediately, but cannot specify the offer he accepts. If you have already received a housing loan approval, you have a better chance of closing the transaction if you can fill out the seller’s request for quick closure.
Final Thoughts on Why is it Important to Get Pre-Approved for a Mortgage?
Again, why is it important to get pre-approved for a mortgage? Because it greatly benefits you by avoiding future disappointments, it may save you money, you can possess the property quicker, you have obtained negotiation power, you will know how much you can pay for a home, and many real estate agents won’t even start working with you until you have your pre-approval letter.
[i] Reed, D. (2008). Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan. New York, NY: Amacom.