A pre-approval letter in this market is almost a requirement to get the attention of sellers. So what exactly is this letter, how do you get it, and what does it mean for the buying process? Here is the scoop!

Pre-Approved vs Pre-Qualified

As you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval.” At the most basic level, prequalification and preapproval are types of mortgage approvals, and they refer to the steps a lender takes to verify that a client can afford a mortgage.

Both prequalification and preapproval provide borrowers with an estimation of how much home they can afford. However, a mortgage preapproval is a more official step that requires the lender to prove & verify your financial information and credit history (where a prequalification can rely somewhat on self-reporting). Think of the prequalification as step one and the preapproval as step two. This means a preapproval is a stronger sign of what you can afford and adds more credibility to your offer than a prequalification. This will also allow you to show sellers a preapproval letter to demonstrate that your financial information has been verified and you can afford a mortgage.

What is a Pre-Approval Letter?

A pre-approval letter is a letter from a mortgage lender that states the amount you are tentatively qualified to borrow up to. In other words, this is the sum total that they are willing to lend you in order to purchase a house. These letters also include a predetermined interest rate. However, this rate can change depending on how soon you put in an offer.

How is the amount determined?

You might be wondering how a lender determines the amount that they are willing to lend to you to purchase a house. To come up with this promised amount, a lender will take into consideration your debt-to-income ratio and your credit score. You will be asked to provide a variety of documents including your bank accounts, asset information, income details, employer contact, and more. Once all the information they need is gathered, an underwriter then determines how large of a loan you qualify for. The better your financial situation, the more you’ll be approved for.

Why is getting pre-approved important?

Narrows down your search

When looking for a new home, you will consider the location, type of house, neighborhoods, school district zones, amount of land, as well as cost. A pre-approval letter helps to narrow down your search to exactly what you can afford. Having this information will make it clear which neighborhoods you should look in and what size properties you should be considering.

This saves you from viewing homes that are way above your price range. The worst thing that can happen is for you to fall in love with a house only to learn that you won’t be able to afford it. Going through a lender from the beginning should save you that heartache.

On the other hand, it will also open up the door to view listings that might be more than you thought you could originally afford. Some buyers play it safe and look at homes well below their budget afraid that they won’t qualify for more. While that’s not always a bad thing to do, a pre-approval letter will point you in the right direction.

Gives you more negotiation room

Many times, especially in the current market, sellers will not even consider an offer without a pre-approval letter. The fear that they will waste time on a buyer who will end up being unable to follow through on the purchase keeps them from taking the risk.
If a seller knows that you’ve qualified for the offer amount they will be more likely to consider your offer. Not only does this give you a leg up over other competitive buyers, but it also allows you to hold more negotiation power. A seller will be more likely to make compromises, such as repairs, improvements, and assistance with closing costs, knowing that they can be confident in the sale going through.

You will close faster

The entire process of closing typically takes at least 50 days. Having a pre-approval letter done at the beginning of the buying process removes the section of closing that involves confirming your financial qualification. This affords you the ability to move through closing with financing already secured meaning you can jump ahead to the next steps. If you or the seller are looking to close quickly, having this will definitely be a huge help.

How to get pre-approved
Now that you know why you should get pre-approved, here is how you do it:

• Research mortgage lenders and choose a few to work with. I can help you with this!
• Compare the rates of each mortgage lender before choosing which one to go with.
• Provide your lender with all of the needed information and documents.
• Allow the lender to work with the underwriter to determine your qualified mortgage amount
• Receive your pre-approval amount and start shopping!