One Homebuying Step You Don’t Want To Skip: Pre-Approval

One Homebuying Step You Don’t Want To Skip: Pre-Approval

There's a crucial step in the homebuying process that might not be widely understood: pre-approval. Let's break down what it involves and why it's particularly important at the moment.

What Is Pre-Approval?

Pre-approval is essentially receiving a green light from a lender—it tells you how much they are willing to lend you for a home purchase. To arrive at this amount, a lender will review your financial history. According to Realtor.com, here are some of the documents a lender might request during the pre-approval process:

• W-2s from the last two years
• Tax returns from the last two years
• Pay stubs from the last 30 days
• Bank statements from the last 60 days
• Investment account statements (if applicable)
• Two years of history of where you’ve lived

The outcome of this process is a pre-approval letter, which specifies the amount you can borrow. It's important to remember that any changes to your financial situation can impact your pre-approval status. Therefore, after receiving your letter, you should avoid making significant financial changes such as switching jobs, applying for new credit cards or other loans, or making large withdrawals from your savings.

How It Helps You Determine Your Borrowing Power

This year, home prices are projected to rise in most areas, and mortgage rates continue to exhibit volatility. Given the ongoing tightness in affordability, it's wise to consult with a lender about your home loan options and how the current fluctuations in mortgage rates might affect your future monthly payments.

The pre-approval process is an ideal opportunity for this discussion. Since it defines the maximum amount you can borrow, pre-approval also helps you establish a realistic budget. You can then use this information to align your home search with what you're actually comfortable spending on a monthly mortgage payment. This approach ensures you don't set your heart on a home that stretches beyond your financial comfort zone.

How It Helps You Stand Out

Once you find a home you want to make an offer on, being pre-approved offers another significant advantage. It strengthens your offer and demonstrates to sellers that you have already passed a credit and financial check.

When sellers recognize you as a serious buyer, your offer becomes more attractive because it appears more likely to close without issues. As Greg McBride, Chief Financial Analyst at Bankrate, explains:

“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.”

Bottom Line

If you're planning to buy a home, securing a mortgage pre-approval should be at the top of your to-do list. This step not only clarifies how much you can borrow, but it also positions you to make a strong offer on a home you love. To get started, connect with a trusted lender who can provide more information and guide you through the pre-approval process.