Getting ready to buy a home? You may be entering the housing search with a budgeted idea of what you can afford monthly, how much you’d like to spend overall and where you’d like your home to be located. However, without a mortgage preapproval, you might be leaving a lot of your financial decisions in the dark.
Getting preapproved is like finding the golden ticket of finances. It gives you a firm number (in writing) that a lender is willing to give you and can change your entire home search. If you’ve never been through a preapproval process, keep reading. You’re going to want to set yourself up for success before hitting the bank.
What is a mortgage preapproval?
Mortgage preapproval is a critical first step in the homebuying process. It’s a commitment from a lender in writing that says they are willing to provide you with X amount of money for your home loan.
The initial appointment can be over the phone or in person, whichever is easier for you. When heading into a preapproval appointment, a loan officer is going to take into account your net worth, credit history, income, tax statements and other basic financial information to fully understand how much they’d be willing to loan you. Obviously the better your credit score is, the higher your income and the less debt you have, the better your preapproval will be.
This is not the same thing as prequalification. That’s based purely on information you tell your loan officer about your finances – it’s how much you could theoretically borrow. If you’re just starting to think about homebuying, prequalification could be a great conversation to see if you’re as far along financially as you want to be before purchasing. But when it comes down to it, what you’re prequalified for does not always equate to what you’re preapproved for, so make sure you go through the formal process before hitting the market.
Once you’re preapproved, your lender will give you a formal statement citing how much you can borrow from them, which you can provide to your real estate agent to shape the rest of your search. In great cases, it may allow you to stretch into a higher budget than you expected! But be aware, just because a lender will loan you that much money doesn’t always mean you should be spending that much money. While banks have reshaped their lending ways since, that was a large part of the housing crash of 2008.
How to obtain a preapproval
Getting a mortgage preapproval doesn’t take too many steps! Many experts recommend shopping around for a loan officer that you trust (and will give you the best deal). A few important things to note, though.
First, a preapproval letter commits the lender to the terms for a certain amount of time, typically 90 days. So if you’re going to shop around, be sure you’re staying within that time limit so as to not miss out on a deal you liked.
Second, shopping around is not likely to hurt your credit score if you do it within a 45-day window after your initial pre-approval. Credit reporting agencies are all for shopping around, so if you’re doing it within that time frame, you’re pretty much in the clear. However, that’s not to say if you miss the window and come back 90 days later that it’s not worth it. If you think you’re going to get a better mortgage at a lower cost, it could be worth a small credit ding.
Get a leg up in a seller’s market
With the market being what it is, it never hurts to make yourself a more attractive buyer. It gives the seller more comfort, as there’s less likelihood of the deal falling through due to financial issues. Similarly, it lets you have a little more room to negotiate. If a seller is eager and your price is right, they might be willing to make some changes, such as repairs, around the home before you buy because the deal feels like a sure thing.
Lastly, it helps you close quicker on a home. On average, it takes about 47 days to close on a house – partly because it takes time to get a mortgage. In cases where you’re preapproved, you can push along the close a little faster.
So if you’re ready to buy a home, start with a Preapproval.
From getting a leg up on your competition to having a better idea of what you can afford, preapproval makes a difference in a smooth homebuying journey. Talk to one of our agents about getting preapproved. They’ll connect you with one of our in-house lending partners from Key Mortgage.