Do You Really Need Mortgage Pre-Approval?
The short answer is yes. Every year, hundreds of buyers make an offer on their dream home only to be outcompeted by more attractive buyers or rejected by a lending institution. Having mortgage pre-approval can help you avoid heartache on both accounts.
Still on the fence? A quick look at what mortgage pre-approval means and how it can benefit you may help.
What is mortgage pre-approval?
Mortgage pre-approval is a written letter or statement issued by your lender to you. Your pre-approval letter states the type of loan you qualify for and the dollar amount of that loan. Your pre-approval letter is based on official financial information and credit reports, which you provide to your lender.
Importantly, pre-qualification is not equivalent to pre-approval. Pre-qualification is based on un-official financial information that you provide. Therefore, pre-qualification is not binding and is of less import than pre-approval.
What are the benefits of mortgage pre-approval?
Pre-approval affects your behavior, your lender’s behavior, and your seller’s behavior.
The benefits of being pre-approved start with the treatment you can expect from your lender. When you are issued a letter of pre-approval, your lender is conditionally committed to giving you that loan amount. Unless your financial situation changes drastically or the home you attempt to purchase fails appraisal, you are guaranteed a mortgage from the moment you receive pre-approval.
Pre-approval can help guide you in your house hunt. When you are pre-approved, you know the amount you can afford to spend on a house and can search within an appropriate price bracket.
Finally, pre-approval gains you favor in the eyes of a seller. When you include a letter of pre-approval with your offer, the seller knows you are good for the amount you have offered on their home. Having a deal fall through is costly for sellers as well as buyers, so giving them reason to be confident in closing a deal with you is a feather in your cap. Plus, you will have one less item to list under your contingencies, as you won’t have to request a financial contingency.
What are the drawbacks to mortgage pre-approval?
The main reason people don’t get pre-approved is because they don’t want to deal with the hassle. The pre-approval process can be exacting, as you have to gather paperwork for your lender (or for multiple lenders, if you are mortgage shopping) and be patient while they crunch numbers.
Unlike pre-qualification, loan pre-approval requires an application fee and a few other upfront costs. Pre-approval expires after one month, so if you don’t find a home within that time, you will have to pay fees and push paperwork again.
Lastly, mortgage pre-approval requires a credit inquiry, and credit inquiries take a bite out of your credit score. Each credit inquiry will cost you 5 credit points. However, if you make multiple inquiries within a few weeks of each other, they will be treated as one inquiry and only cost 5 points. This is not true if your pre-approval expires after a month, and you decide to re-apply for pre-approval. Your credit score will take another 5-point drop.
The greater percentage of prospective buyers who opt for pre-approval find that the pros outweigh the cons. Being pre-approved is a way to get your foot in the door of your dream home. If you’re not convinced yet, talk to your real estate agent or to friends who are homeowners. They’ll likely tell you that pre-approval is the way to go!