Should you get pre-approved for a mortgage before looking?
In this competitive homebuying market, getting pre-approved for a mortgage is truly the first step that you should take in buying a home.
However, first-time homebuyers are often intimidated by amount of legwork that it takes to get approved and end up shuttling this process to the end of their to-do list, which can be a costly mistake.
So, if you’re one of those would-be buyers, this post is for you. We’re taking a closer look at exactly why it’s so essential to get a pre-approval before you even start your house hunt. By the time you’re finished, you’ll be ready to make an appointment with a lender or two. 😬
Pre-approval helps clear up financial issues
Like checking your credit score for the first time, applying for a pre-approval can feel a little intimidating. It forces you to take an honest look at your finances, something which a lot of us would rather avoid. However, the sooner you take the plunge on this one, the better.
No matter how messy your financial situation may be, getting a pre-approval can actually help you get it on track.
That’s because the paperwork needed to become pre-approved for a mortgage gives your lender a thorough view of your financial standing. Once a lender looks into your information, he or she will be able to find the root cause of your issues, if there are any, and give you advice on how best to tackle them.
Even if you apply for a pre-approval, only to find out that you’re not quite ready to buy in your desired price range just yet, take what your lender says seriously.
Ask them to help you figure out a plan to get to your goal of a becoming a homeowner. Then, be sure to stick to it. With any luck, in a little time, you’ll be in a much different position.
Pre-approval defines your search
Like it or not, your pre-approval will be the thing that decides your price range.
Even if you know that you have a pristine financial history, it’s still crucial to apply for a pre-approval as soon as possible. Above all else, this document likely become the single-most defining factor in your home search.
When the bank green lights your pre-approval request, they’re essentially guaranteeing that they’ll agree to lend you a up certain amount of money.
How much money a particular institution will agree to lend you can vary, depending on their internal policies, which is why some people recommend applying at a few different ones to get a sense of how much you can afford.
Once you have a pre-approval in hand, you’ll be able to use that number to determine which properties are a good fit for you to see. After all, no one wants to fall in love with their dream home, only to realize that it’s completely out of their budget.
That villa you fell in love with might not be in your price range
Rather, it makes sense to use the amount on your pre-approval as your absolute maximum budget.
You don’t necessarily have to spend that much, but you can, if you need to.
Getting pre-approved lets you move quickly
These days, houses go off the market fast. In order to be competitive, buyers need to make sure they’re ready to submit an offer as soon they’ve found a home that they love.
Having a pre-approval in hand is part of making a strong offer. The fact that you’ve taken the time to have a lender vet your finances shows the seller that you’re a serious contender, and often, in this market, sellers won’t even consider an offer without mortgage pre-approval unless it’s all cash.
In a multiple offer situation, offers with pre-approvals attached will nearly always be given precedence over ones with that just have a pre-qualification.
Keep in mind: getting a pre-approval doesn’t happen overnight. Since your lender needs to verify all of your financial information, this process can take a day, or depending on your financial situation, even weeks to complete. That’s why it’s best to get it out of the way at the beginning so you’re truly ready when the time comes to make a move.
A note on applying with multiple lenders
Too often, we hear of buyers who end up financing with the first lender they come across because they were worried that applying with multiple institutions would negatively impact their credit score. But, this simply isn’t true.
Thanks to the Dodd-Frank Act, which was signed in 2010 and meant to protect buyers after the recession, applying for a pre-approval is now considered a soft inquiry, meaning it has a negligible impact on your score.
Furthermore, every pre-approval inquiry initiated within the same 30-day period now counts as one in the same. As long as you visit every lender on list with 30 days, you’ll be free to shop around without getting multiple hits to your credit score.
Okay, you get it. Now what?
Get your financial paperwork — often 30 days of recent pay stubs, two years of t4’s or tax returns, plus quarterly account statements for all your assets — in order before you start applying.
Do your research, and pick a few of the best lenders in your area. We have a few partner lenders our buyers have enjoyed working with, but it’s worth shopping around to make sure you’re finding the best lender for you.