Importance of Obtaining Mortgage Pre-Approval when Buying a Home
Most often, the first step when purchasing a home is securing financing. This is important step before making offers on properties because being pre-approved for a mortgage gives the seller better peace of mind of the home purchase going through.
There are many different types of mortgages available. When buying a home, it’s important for a buyer to know what type of mortgage best suits their needs, the maximum price property they can obtain and avoid common mortgage mistakes.
There are many buyers out there who don’t understand why it’s important to get a pre-approval and believe they don’t need a mortgage pre-approval before looking at homes. This is one of the top things that buyers do that annoy real estate agents. Real estate agents are busy people. If you are not pre-approved for a home loan, what incentive does the real estate agent have to show you homes? It may take hours to view a single property, hours that could be spent on clients that can buy a home. A real estate agent doesn’t want to squander their time showing a bunch of homes to you at a price range that you are not qualified for. Make sure you get pre-approved for a mortgage before asking to see home.
Pre-Approval Versus Pre-Qualification
There are some people that believe a pre-approval and a pre-qualification are the same, they are not. So, what’s the difference?
Pre-qualification tends be a less stringent valuation for loan, while a pre-approval can require you share more personal and financial information with a creditor. As a result, an offer based on a pre-qualification may be less authentic or assured than an offer based on a pre-approval.
A mortgage pre-approval is when a lender gives their written commitment to a potential borrower. The mortgage pre-approval process is one in which a lender will obtain from the potential borrower their bank statements, credit reports, tax returns for the past several years and verify their employment. It’s a more involved process than pre-qualification.
Just because you received pre-approval there are still other conditions that have to be met before the lender releases the funds. The most common condition in a mortgage pre-approval
- Buyer finds the property
- A successful appraisal- meaning the property is worth what it is being sold for
- Homeowner insurance secured
- Continued creditworthiness
- Depending on the financing, proof of an acceptable home inspection.
When Should You Get Pre-Approved for A Mortgage?
Before you begin looking at houses. Listed below is why it’s so important you obtained a pre-approval for a mortgage before looking at houses!
Why Should You Get Pre-Approved for A Mortgage?
1. Correct Possible Credit Issues
It’s not unusual for a potential buyer to not know what their credit score is, especially first time buyers. It’s also plausible that a buyer might have credit issues on their report that they’re not aware of. The most common problem with a potential buyer’s credit is their score. There is minimum credit score requirement that each lender has for each one of their loan products.
Another common credit issue is an error with a buyer’s credit. Most people don’t monitor their credit report and sometimes there can be errors on a person’s report. The process to get errors removed from a credit report can include sending letters to the creditor and the credit bureaus. (Read “Let’s Fix that Credit Score”.) It can sometimes take a couple of months for it to get corrected on your report and score to be reconciled.
2. Eliminate Disappointment
No one likes to be disappointed. The same goes for someone who is purchasing a home. A buyer can “fall in love” with a home, submit a purchase offer, and find out once they speak with a mortgage lender that they cannot obtain that home due to credit problems or because of other reasons. This understandably can leave a buyer upset and disappointed! This can all be avoided by having a mortgage pre-approval before looking at homes.
3. Find Out Total Cost and Fees to Buying a Home
There are many costs associated with buying a home. By getting a pre-approval, you will have a very strong understanding what costs you should expect when buying a home, so there are no surprises. Usually, when buying a home, you have to pay:
- down payment
- a full year’s real estate tax
- an entire year’s homeowner’s insurance
- loan and recording fees
- and many miscellaneous costs.
Bottom line, get pre-approved so you have a full understanding how much money you will need to close on your dream home, who you will be paying these costs too, and also why you are paying these costs.
4. Multiple Offers
Knock out the competition with a mortgage pre-approval
If it’s a seller’s market in the area you are looking to purchase, there is the likelihood of multiple offers for a property you want. A pre-approved buyer is likely to win in a multiple offer situation against a buyer who only has a pre-qualification letter, assuming the majority of the other terms in the purchase contract are fairly similar.
5. Quicker Closing
A pre-approved buyer will be able to close quicker than a buyer who is pre-qualified.
The main reason a quicker closing can happen is because the majority of the background checking has been completed by the lender prior to obtaining an accepted offer on a property. Once a pre-approved buyer is under contract and any inspections are completed, the lender can order the appraisal on the property. As a pre-approved buyer, you will have already filled out the mortgage application, given the past few years tax returns, and your credit has been extensively qualified.
6. Self Employed Or Commission Based Buyers
If you are self-employed or are considered an independent contractor, getting a pre-approval is extremely important to do before looking at homes. The part that can be challenging is documenting your income. Proving your cash flow as a business owner, contractor, freelancer, or gig worker can require more paperwork than for W-2 employees. If you are a self-employed buyer, you will need to provide at least, 2 years tax returns.
Often lenders will require 2-3 years proven history showing the commission amounts earned is fairly consistent. A lender wants to be comfortable that the commission income is obtainable, year after year, before approving the loan.
As you can see, there are many reasons why having a mortgage pre-approval is important and why it should be done before you look at homes. Don’t make the mistake that some buyers do, which is not getting their pre-approval in order before looking at homes.
Other Mortgage & Home Buyer Related Resources
- 4 Common Mortgage Mistakes when Buying a Home
- 3 Ways to get your Credit Ready for buying a Home
- What are Loan Origination Fees?
- A Guide to Buying your First Home
- How to Get a Mortgage in a Gig Economy
Are you looking to purchase a home in the Charleston, SC area? It’s very important when getting a pre-approval, you consider using a local mortgage lender who has a great reputation. I’d be glad to recommend a few mortgage consultants for you to contact for your financing needs. Contact me and I can help you get started on your mortgage pre-approval today!
Servicing the following Charleston, SC areas: Charleston, Mount Pleasant, Daniel Island, Isle of Palm, Sullivan Island, James Island, Johns Island, West Ashley, Kiawah, North Charleston, Summerville, Goose Creek.