Pre-Approval for a Home Mortgage Loan: Why It Is Important

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Buying a home? It’s not required, but there are many reasons why it’s wise to obtain pre-approval on a loan before you begin your search.

A mortgage pre-approval is a statement from a lender that says you are qualified to borrow up to a certain amount. It may also include a pre-approved interest rate, although this number can change because mortgage rates are variable. It doesn’t take too much time to obtain a mortgage pre-approval letter. Simply contact a lender or broker, explain your situation, and they will guide you through the process from start to finish.

To determine the approved loan amount, lenders consider the same factors as for a traditional mortgage approval, including your debt to income ratio (DTI) and your credit score. The more stable your financial situation looks, the more you’ll be pre-approved to borrow. To learn about the difference between Pre-qualifying and a Pre-Approval, click here to see our article on that topic.

  • You’ll speed up your house hunting process. You’ll know how much you can afford, so you’ll be able to set price and cost limits and ensure that any home you look at is a home that you will be able to finance. You’ll have less stress with pre-approval, and it will save you time. You don’t have to shop at the top of your price range. Depending on the market, you might be able to get into a home you like for less money than you’re approved for, or have the cash you need for a home you thought was out of range.
  • It gives you an advantage in today’s seller’s market. If you are one of two or more buyers making an offer on a home and only one of you has a mortgage pre-approval, the seller is highly likely to go with the buyer with a pre-approval. There’s a lot less risk to the seller that the deal will fall through due to insufficient financing. Maximize your appeal and minimize your chances of losing a bidding war.
  • You’ll have more room to negotiate. In addition to making you a more attractive buyer, a mortgage pre-approval may give you some flexibility in terms of bargaining and negotiations. That’s because sellers who know that a buyer is already qualified for the offer amount and the sale is a sure thing may be more likely to make some compromises. If you want some repairs or improvements or if you want the seller to cover your closing costs or purchase a home warranty for you, your mortgage pre-approval will help strengthen your position and may make it more likely that you get what you’re asking for.
  • You’ll close faster. Securing financing is the first thing that has to happen when you want to close on a home. With a mortgage pre-approval, financing is already secured and you can move to the next steps, such as an appraisal and home inspection. This is an especially appealing advantage if the seller is also trying to close sooner than later.
  • You’ll get better results from realtors. They prefer to work with home buyers who have a pre-approval in hand for two reasons.
    • Realtors know the deal isn’t likely to fall through.
    • They know what you want and what you can afford, so they know exactly what to focus on and are able to suggest different neighborhoods, sizes and conditions of homes that match your needs.

Asking for pre-approval six months to one year in advance of a serious home search puts you in a stronger position to have the time to improve your overall credit profile. You’ll also have more time to save money for a down payment and closing costs.

To get pre-approved, you must complete an official mortgage application and supply the lender with all the necessary documentation to perform an extensive credit and financial background check. If you qualify, the lender then offers pre-approval up to a specified amount. Some lenders allow borrowers to lock in an interest rate. They provide a conditional commitment in writing for an exact loan amount.

Mortgage pre-approval letters are official documents on the lender’s stationery. They are typically valid for 60 to 90 days. Lenders put an expiration date on these letters because your finances and credit profile could change. When a pre-approval expires, you’ll have to fill out a new mortgage application and submit updated paperwork to get another one.

When you are ready to make offers, a seller knows you’re a serious buyer when you can show pre-approval. When there is high buyer demand and a limited number of homes for sale, sellers may be less likely to consider offers without pre-approval letters.

Remember that a mortgage pre-approval doesn’t necessarily guarantee you will get a loan. Pre-approval letters are conditional on your financial and employment information being accurate and consistent before your loan closes. If you fail to disclose key information—a divorce, an IRS tax lien, or some other issue—and a loan underwriter finds out about it later, you can be denied a loan.

A Citywide Loan Officer is ready and willing to guide you through the pre-approval process, making it easy for you to know if you qualify for a loan, or to expedite the purchase process if you are ready to start seriously looking for that new home of your dreams.

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