During the mortgage pre-approval process, a mortgage lender will review your financial situation to determine whether or not you’re qualified for a loan. If you do appear to be qualified, they’ll also give you a maximum amount they are willing to lend.
It’s a worthwhile process for several reasons. Here are the four main benefits of getting pre-approved for a home loan, before you start shopping for a house.
- You can identify problems early on in the process.
Lenders can uncover a lot of potential problems during the mortgage pre-approval process. Maybe your debt levels are too high in relation to your income. Maybe your credit score is too low. The sooner you can find out about these things, the better. It gives you more time to correct them.
Without this process, you could spend days or weeks shopping for a home only to find out you’re not qualified for a loan. That’s a waste of time and energy. Identify problems early, and then work on correcting them. This is the sensible approach. It’s also one of the key benefits of getting pre-approved.
- It helps you narrow down the house-hunting process.
Imagine this: You spend three weeks looking at homes in the $300,000 price range. You look at them online and also by driving through neighborhoods. Then you find a house that is perfect for you. So you approach a mortgage lender to apply for a loan. The lender says they’re willing to lend you $225,000 — max. This can’t be right, can it?
So you speak to three other lenders, and they all give you similar numbers. You’ve just wasted a lot of time by shopping in the wrong price range.
This is another area where mortgage pre-approval benefits you, as a home buyer. Granted, your own personal budget is the most important spending limit to keep in mind. But it also helps to know what the lender is willing to lend you. That way, you can limit your house-hunting process to the types of homes you can actually afford to buy.
- Real estate agents will want to work with you.
Many real estate agents are reluctant to work with buyers who haven’t been pre-screened by a mortgage lender yet. Here’s a scenario that illustrates why:
Let’s say I spend three weeks showing homes to a nice couple who are buying their first house. They find a suitable house, and they go on to speak with a lender about getting a loan. It turns out they both have very low credit scores and a mountain of debt. No mortgage loan for this couple. And I’ve just spent three weeks of my time showing them houses they can’t even afford.
These days, most agents will only work with buyers who have a mortgage pre-approval letter from a lender. They want to make sure you’ve been “vetted” by a lender, before they spend a lot of time helping you with your house hunt. It’s perfectly logical when you think about it.
- Sellers and their listing agents will take you seriously.
This piggybacks on what we just talked about. If you try to schedule a showing to see a home, the listing agent will probably ask if you’ve been pre-approved by a lender (or if you have some other form of financing lined up).
They do this for the same reason we discussed earlier. They would rather deal with buyers who have been pre-approved, because it indicates there’s a good chance they’ll get financing.
Now imagine a scenario where the seller gets two offers — one from a buyer who has been pre-approved, and one from a buyer who has not. The second buyer is an unknown variable, where financing is concerned. Which offer do you think the seller would accept? Which one would you accept?