The importance of getting preapproved before you start your home search

You’re in the market for a new home and want to make sure you stand out from other potential buyers. You don’t want to get passed up for the home of your dreams, so you want something that demonstrates you are serious about the purchase of the new home. Getting preapproved at the beginning of your home search process demonstrates exactly that.

What Does a Preapproval Mean?

During the preapproval step, home buyers will fill out a mortgage application and provide personal details such as recent pay stubs, down payment, the cost of the home, credit, and recent tax returns. The lender verifies the information provided and issues the borrower a preapproval letter, which includes how much the borrower is approved for upfront and at what interest rate. This allows borrowers to hunt for a house knowing the amount they have been approved for and the loan terms. Most preapproval letters are valid for 90 days, giving you ample time to search for the right home, but this may vary between lenders. 
Getting a preapproval letter means that in the house-hunting process, the borrower can focus on homes that they can afford based on their finances. Preapprovals are not binding, so the borrower can still shop around to find the right home loan opportunity and negotiate potentially better loan terms with another lender. Since preapprovals require a hard credit pull, borrowers should try to complete all preapprovals within a 30-day window so that they only count as one item on the credit report. This allows borrowers to shop around and receive preapprovals from other lenders so that they are confident that they are getting the best deals. 
If denied for preapprovals, borrowers may need to reevaluate their applications, choosing to offer a larger down payment or opting for a longer mortgage term to reduce monthly costs in addition to potentially applying with a co-applicant or cosigner. Additionally, if you were denied on your mortgage application after being preapproved, the cause could be a change in your income, credit score, or other factors that makes lenders view you as a borrower that is too risky. 

What is Required for Preapproval?

To be preapproved by a lender, a borrower will want the following information for a successful process: Copies of most recent pay stubs, recent tax returns, bank account number or recent bank statements, down payment, home cost, and a credit check on the buyer. In some cases, it can take a few business days or more, if a detailed audit of financial information is required. In other cases that are straightforward, lenders can have their letter of preapproval the same business day. While it may seem like a lot of information required, you will need the same documentation when applying for your mortgage, so preparing it at the preapproval stage saves time in the long run.

The Advantage of Preapproval

For home buyers, a letter of preapproval is as good as cash when discussing purchasing a home. It shows a seller and their real estate agent that you have a lender willing to back up your purchase of a home. Both you and the seller can be confident that the funds will be available when you choose to buy. This is more favorable to sellers because someone without a preapproval letter cannot document if the home fits within their budget and if they are an eligible buyer.

Preapprovals are also beneficial because they allow buyers to know exactly how much home they can afford. Rather than wasting time looking at a home out of your budget, a preapproval letter helps home buyers focus their efforts on properties they will be able to afford. While a preapproval does not guarantee that you will be approved for the final loan application, the lender has already reviewed your financial information to determine what you can afford.
Additionally, borrowers may be preapproved to homes more expensive than what they can afford. They should not feel intimidated to get the most expensive house they are preapproved for, they should focus on getting a home that fits within their long-term expenses.
When beginning the home buying process, you will want to obtain a preapproval letter. Not only does it help you, the buyer, understand how much house you can afford, but it helps the seller understand that you are a qualified buyer. They will know you are not wasting your time looking at a house outside of your price range, but have at least one lender willing to loan you the money for a mortgage.