What is mortgage pre-approval and how can it help you to get the house of your dreams? Find out the answer here.
Image Credit: Getty Images
If you're shopping for a home, one of the first things you should do is go to the bank to get pre-approved for a mortgage. Pre-approval is different than pre-qualification. When you get pre-approved, you provide basic financial information to the lender who looks at your credit score, income, and other relevant factors to determine the amount you can borrow.
Getting pre-approved may seem like a hassle, especially if you're eager to start shopping for the house of your dreams. But, it's an important first step you should make before heading out with a realtor to look at houses.
Here's four reasons why getting pre-approved makes sense for you.
So you'll know what you can afford
Mortgage lenders won't just loan you an infinite amount of money -- there's a maximum limit in what you can borrow based on your income, credit, and other relevant factors such as the amount of your down payment.
If the bank is willing to loan you only $150,000, there's no sense in looking at $500,000 homes -- it would be a waste of everyone's time since you couldn't afford to buy unless you had a lot of cash to bring to the table.
By getting pre-approved, you'll know your upper price limit and can use online listings or get help from a realtor to narrow your search only to houses in your price range.
So you'll have an idea of what your monthly payments will be
When you know how much you are able to borrow, you can get a pretty good idea of what your monthly payment is likely to be.
While this can change unless you lock in your interest rate and know exactly how much you'll be borrowing, at least you'll have a rough estimate of how much you'd spend if you were to borrow the maximum amount your bank would give you.
When you know what payments you're looking at, you can factor this into your budget to see if it's affordable to borrow the maximum. You don't have to borrow as much as the lender is willing to provide to you, so you can make an informed choice about the homes you want to look at and the price you're willing to pay.
So you'll be able to make a competitive offer
When you make an offer to a seller, the seller doesn't want to waste time with you unless there's a good chance the transaction will be successfully completed.
If you have no pre-approval from a mortgage lender and no idea of how much you're going to be able to borrow, the seller may feel you aren't serious about the purchase or may be worried you won't have the money to follow through with it.
A pre-approval letter shows the seller that a mortgage lender has pre-screened you and is willing to loan you the money to complete the transaction. While things can still fall apart -- say if your income dramatically decreased after you were pre-approved -- the pre-approval information at least provides a seller with a degree of certainty that you can actually purchase the home.
Some sellers -- especially in a competitive market, will not even consider an offer without a pre-approval letter attached. You don't want to lose out on the house of your dreams because of paperwork, so make sure you have a letter of pre-approval to include with your offer.
So you can catch problems early
When you apply for a mortgage and provide your paperwork for pre-approval, you may be surprised to find you don't get approved or are approved for much less than anticipated. This could occur because of an error in your credit report that causes problems with lenders.
It's best to find this out at the start of the home-shopping process so you'll have time to correct the problem before you've fallen in love with a home you lose out on as you wait for your credit report to have incorrect information removed.
Getting pre-approved is worth it
With so many benefits of getting pre-approved for a mortgage loan, it's worth making the effort to provide your financial information to lenders and get a pre-approval letter. That letter could be the difference between your offer getting accepted or rejected, and you don't want the perfect house to slip through your fingers once you've found it.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.