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 supply of homes for sale increasing and mortgage rates declining, you might feel it's finally your time to enter the market. To ensure you're prepared, getting pre-approved for a mortgage is a crucial step.

Pre-approval involves a lender reviewing your financial details, such as your W-2, tax returns, credit score, and bank statements, to determine how much they’re willing to lend you. After this process, you'll receive a pre-approval letter that outlines the amount you can borrow. Here are two key reasons why this is essential in today’s market.

Pre-Approval Helps You Know Your Numbers

While home affordability is beginning to improve, it remains challenging for many. That’s why it’s important to discuss your loan options with a lender and understand how the current shifts in mortgage rates will affect your monthly payments. The pre-approval process is an ideal opportunity to explore these details. Besides determining the maximum amount you can borrow, pre-approval also provides valuable insight into this critical aspect of home buying. As Investopedia notes:

“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 fine-tune your home search to fit within your budget comfortably. With mortgage rates having recently decreased, you might discover that you can afford more than you initially expected for your monthly payment. However, it’s important to avoid stretching yourself too thin financially. 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 passed a credit and financial check. This shows sellers you're a serious buyer, making your offer more appealing and likely to be accepted. As Greg McBride, Chief Financial Analyst at Bankrate, says:

“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 downward, more buyers will be eager to re-enter the market. While demand is currently limited, there's a chance that competition could increase, particularly in popular areas. To give yourself the best chance of success, why not ensure you're fully prepared to make a strong offer when you find the perfect home?

Bottom Line

If you're planning to buy a home, make sure to get pre-approved early in the process. This will give you a clearer picture of what you can borrow and signal to sellers that you're a serious buyer.