Since the supply of homes for sale is growing and mortgage rates are coming down, you may think it’s finally your moment to jump into the market. To ensure you’re ready, you must get pre-approved for a mortgage.
That’s when a lender looks at your finances, including your W-2, tax returns, credit score, and bank statements, to determine what they’re willing to loan you. After that process, you’ll get a pre-approval letter to show what you can borrow. Here are two reasons why this is essential in today’s market.
Pre-Approval Helps You Know Your Numbers
While home affordability is finally starting to show signs of improving, it’s still tight. So, talking to a lender about your loan options and how today’s changing mortgage rates will impact your monthly payment is a good idea. The pre-approval process is the perfect time for that. In addition to determining the maximum amount you can borrow, pre-approval helps you understand this puzzle. As Investopedia says:
“Consulting with a lender and obtaining a pre-approval letter allows you to discuss loan options and budgeting with the lender; this step can clarify your total house-hunting budget and the monthly mortgage payment you can afford.”
You should use this information to tailor your home search to what you’re comfortable with budget-wise. Since mortgage rates have inched down somewhat lately, you may find you can afford more than you’d expect for your monthly payment, but you still want to avoid overextending it. As CNET explains:
“In many cases, a lender may preapprove you for more than you need to spend on a home. And while it can be tempting to look at houses outside your budget, it won’t help you in the long run. Before you start touring homes, figure out how much you can realistically afford and stick to your budget.”
Pre-Approval Makes Your Offer More Appealing
Once you do find a home you want within your budget, pre-approval has another big perk. It not only makes your offer more substantial, it also shows sellers you’ve already undergone a credit and financial check. When a seller sees you as a serious buyer, they may be more attracted to your offer because it seems more likely to go through. As Greg McBride, Chief Financial Analyst at Bankrate, says:
“Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns and bank statements. A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”
As mortgage rates trend down, more buyers will be ready to return to the market. And while demand is still limited, there’s the potential for competition to pick back up, especially in hot markets. So, why not stack the deck in your favor and ensure you’re putting yourself in the best position possible when finding a home you love?
Bottom Line
If you’re planning on buying a home, remember to get pre-approved early in the process. It can help you gain a more in-depth understanding of what you can borrow and show sellers you mean business.