There’s one essential step in the home buying process you may not know a lot about: pre-approval. Here’s a rundown of what it is and why it’s so important.
What Is Pre-Approval?
Pre-approval is like getting a green light from a lender. It lets you know how much they’re willing to let you borrow for a home. To determine that number, a lender looks at your financial history. According to Realtor.com, these are some of the documents a lender may ask you for during this process:
- W-2s from the last two years
- Tax returns from the last two years
- Pay stubs from the last 30 days
- Bank statements from the last 60 days
- Investment account statements (if applicable)
- Two years of history of where you’ve lived
The result? You’ll get a pre-approval letter showing what you can borrow. Keep in mind, that any changes in your finances can affect your pre-approval status. So, after you receive your letter, avoid switching jobs, applying for new credit cards or other loans, or taking out large sums of money from your savings.
How It Helps You Determine Your Borrowing Power
This year, home prices are expected to rise in most places and mortgage rates are still showing some volatility. So, since affordability is still tight, it’s a good idea to talk to a lender about your home loan options and how today’s changing mortgage rates will impact your future monthly payment.
The pre-approval process is the perfect time for that. Because it determines the maximum amount you can borrow, pre-approval also helps you figure out your budget. You should use this information to tailor your home search to what you’re actually comfortable with as far as a monthly mortgage payment. That way, you don’t fall in love with a house that’s out of your comfort zone.
How It Helps You Stand Out
Once you find a home you want to put an offer on, pre-approval has another big perk. It not only makes your offer stronger, but it also shows sellers you’ve already undergone a credit and financial check.
When a seller sees you as a serious buyer, they may be more attracted to your offer because it seems more likely to go through. As Greg McBride, Chief Financial Analyst at Bankrate, says:
“Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns, and bank statements. A pre-approval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”
Bottom Line
If you plan on buying a home, getting pre-approved for a mortgage should be one of the first things on your to-do list. It will give you a better understanding of your borrowing power and put you in the best position possible to make a strong offer when you find a home you love. Connect with a licensed mortgage professional to learn more.
