Why Pre-Approval Should Be at the Top of Your Homebuying To-Do List

Why Pre-Approval Should Be at the Top of Your Homebuying To-Do List

With the growing supply of homes for sale and decreasing mortgage rates, you might be considering making your move in the market. To ensure you're prepared, it's crucial to get pre-approved for a mortgage.

During pre-approval, a lender reviews your finances—such as W-2s, tax returns, credit score, and bank statements—to determine the loan amount they are willing to offer. You’ll then receive a pre-approval letter indicating your borrowing capacity. Here are two reasons why this step is essential in today’s market:

Pre-Approval Helps You Know Your Numbers

Although home affordability is showing signs of improvement, it remains tight. Speaking with a lender about your loan options and how current mortgage rate changes will affect your monthly payments is wise. The pre-approval process is an ideal opportunity for this. It not only determines the maximum amount you can borrow but also helps you understand how mortgage rates will influence your payments. As Investopedia explains:

“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 align your home search with your actual budget comfort level. Although mortgage rates have recently decreased slightly, allowing for potentially higher affordability, it's important to avoid overextending yourself. 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 find a home within your budget, pre-approval offers another significant advantage. It not only strengthens your offer but also demonstrates to sellers that you've already undergone a credit and financial review. A seller is more likely to be attracted to your offer, viewing it as more reliable and likely to close. 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.”

As mortgage rates continue to trend down, more buyers will be poised to re-enter the market. Although demand is currently limited, competition could intensify, especially in popular areas. To put yourself in the best position when you find a home you love, consider getting pre-approved and strengthening your offer. This approach will help you stand out in a potentially competitive market.

Bottom Line

If you’re planning to buy a home, be sure to get pre-approved early in the process. It provides a clearer picture of what you can borrow and demonstrates to sellers that you’re a serious buyer.