Why You should get preapproved first

Pre-approval can help you resolve financial issues

First things first, let’s clarify a few things around pre-approvals. 

For one, a pre-approval is not the same as a pre-qualification.

 A pre-qualification, which is based on information borrowers supply to the lender as well as a soft credit pull, can be a great tool to help buyers see how much they might qualify to borrow.

Alternatively, a pre-approval is issued after the lender performs a thorough review of a borrower’s financial records or hard credit pull. For this reason, many sellers will request buyers have a pre-approval letter given the amount listed on the letter more accurately reflects the buyer’s purchasing power.

Applying for a pre-approval can feel a little intimidating. It forces you to take an honest look at your finances, which is something a lot of us often dread. The good news is that no matter how messy your financial situation may be, getting a pre-approval could actually help you get it on track.

The paperwork required to get pre-approved for a mortgage gives lenders a thorough understanding of your financial standing. With this information, they can find the root cause of any issues 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, it’s better to learn that before you start shopping. With some time and additional savings, you should be in a much different position.

In most cases, your pre-approved loan amount will essentially determine your price range.

How much money a particular institution will agree to lend you can vary based on their internal policies, which is why some people recommend applying with a few different lenders to get a sense of how much you can realistically afford. Actually, it’s a good idea to view your pre-approval amount as your maximum.

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 entirely out of their budget.

These days, houses can 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 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 buyer. In competitive markets, sellers often 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 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 to even weeks to complete depending on your finances. 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.

Buyers often worry that applying with multiple institutions will negatively impact their credit score. This is only partially true. Mortgage pre-qualifications are based on “soft” credit pulls (inquiries) (surface level look at an applicant’s lines of credit, loans, payment history, and any collections accounts), whereas mortgage pre-approvals are based on “hard” credit pulls (in-depth review of an applicant’s entire credit history).

Soft pulls are generally used for exploratory/estimation purposes while hard pulls suggest an intent to borrow (or increase one’s debt). As such, hard inquiries will incur about a 5-20 point penalty (depending on the credit reporting bureau); soft inquiries do not.

The good news is that borrowers can apply for multiple pre-approvals in a 14-45 day period (depending on the credit reporting bureau), and they will all count as one hard inquiry. Hard inquiries remain on a borrower’s credit report for 2 years before being removed.

Gather the necessary financial paperwork — typically pay stubs issued in the last 30 days, two years of W2’s or tax returns, and quarterly account statements for all your assets. If you haven’t already, request your credit report (there are sites that can help you obtain one free copy of your credit report each year). Review your report and reconcile any errors you may find. Next, you’ll want to take a look at your budget. Figure out how much you can afford to pay monthly for a mortgage.

Now, you’re ready to start applying! Do your research, and pick a few of the best lenders in your area. It’s worth shopping around to make sure you’re finding the best lender for you.

 Written by Heidi Knight