If you’ve never purchased a home before – or it’s been a few decades since you’ve done it – you may not be realize that getting a pre-approval letter from a mortgage provider is one of the first steps towards the home search and purchase process. And if you don’t know much about the pre-approval process, now is a great time to learn.
What is Pre-Approval?
In the most basic sense, a pre-approval is an assurance from a lender that you will be qualified to finance a home purchase up to a certain dollar amount. It’s not necessarily a guarantee – as something could happen or be uncovered during the due diligence that takes place during approval – but it’s a pretty safe bet.
A pre-approval comes on the lender’s letterhead and provides a dollar amount. Your agent may ask for this letter – just to be sure they’re dealing with a serious buyer – as well as any homeowner that seriously considers accepting an offer you put on their property.
Pre-approval isn’t required by law, but as you’ll see in the following section, it offers an array of benefits as you begin the process of finding your next house.
The Benefits of Getting Pre-Approved
It’ll take time to work through the pre-approval process, so it’s natural for a prospective homebuyer to ask, “Why?” Well, without knowing any specifics about your situation, here are some of the major benefits that come with getting pre-approved by a lender:
- Helps you know how much you can afford. First, and most importantly, a pre-approval letter tells you how much you’re able to afford. If you get approved for a $300,000 mortgage, this sets your upper parameter in place and allows you to narrow your search for homes that fall under this threshold.
- Shows sellers that you’re serious. In most markets, an offer without pre-approval is going to quickly be tossed into the trash when compared to other offers that do have pre-approval. So if you want to show sellers you’re serious and level the playing field, go ahead and get that pre-approval.
- Increases your leverage. When putting in an offer, you want to make things as easy as possible on the seller. Pre-approval provides assurance and gives you some negotiating power and leverage that wouldn’t otherwise exist.
- Saves time. Getting a mortgage isn’t something that happens overnight. When hundreds of thousands of dollars are at play, a bank is going to do some thorough due diligence. By becoming pre-approved, you’re able to shorten the standard approval process and cut down on the amount of work that must be done to finalize the financing.
- Helps with finding an agent. A serious agent – someone who is working with lots of clients and has a solid reputation in the industry – won’t work with a client if they can’t provide a pre-approval letter. This, in and of itself, is a reason to get pre-approved.
Getting pre-approved is really a no-brainer. It’s something every prospective buyer should do to kickstart the process and get on with finding their next home – and you should, too.
5 Tips for Getting Pre-Approved
The process of getting pre-approved is pretty straightforward. There’s no reason to stress about it, but there are some steps you can take to increase your chances of getting pre-approved for the right amount. Here are a few tips:
- Review Your Credit Score
The lender is going to be pulling your credit score, so it’s smart to go ahead and review the score on your own and see where you stand. Most lenders will want to see a score of at least 680 for conventional financing (or 620 for an FHA loan). If you’re at or below this marker, you may want to take a few months to improve your credit score before proceeding.
- Save Up Some Cash
You’ll most likely be required to put forth a minimum of 3.5 percent down on a home purchase. And if you want to do away with PMI, you’ll need to put at least 20 percent down. The bank is going to make sure you have at least enough liquid cash to cover the bare minimum. Now’s the time to start stockpiling cash. It’ll help you get approved, while also improving your financial situation when it comes time to approach the closing table.
- Stay in Your Job
Now’s not the time to make a career pivot or change jobs. You want to show the lender that you’re in a stable financial position. This will make you a more attractive candidate. If you’re looking to make a change, wait until after you close on a house.
- Avoid New Debt
You don’t want to pick up any new debt between now and when you close on the house. Avoid adding any car loans, credit card debt, or payments. Keep your budget lean and lay low.
- Organize Your Finances
When it comes to getting pre-approved, the bank or credit union you’re working with will ask for some documents and information to guide their decision. Here’s a sample list of what you’ll need:
- Pay stubs showing your year-to-date income
- The previous two years of tax returns and W-2 forms
- Statements showing your asset accounts (including checking, savings, 401(k), etc.)
- Records for any real estate you own
- Residential history for the past two years
- Landlord contact information (if applicable)
Gathering and organizing these documents ahead of time will save you a considerable amount of effort when it’s time to provide the appropriate information.
Buy Your Next House With Green Residential
At Green Residential, we take great pride in working with homeowners and real estate investors throughout the Greater Houston area – and have for the last three decades. If you’re interested in buying a home in the near future, please give us a call, and we’ll walk you through some of the steps that are involved in the process. We look forward to building a relationship!