Reader question: “We are about to start the house hunting process to find a home. We haven’t yet been approved for a mortgage loan. A friend recommended that I get pre-approved by a lender before I start looking at homes. The way he explained the process left me more confused than anything (and I didn’t have time for him to clarify it). What is the point of pre-approval? And should I get pre-approved for a mortgage before looking at houses?”
Your friend is correct. It’s probably a good idea to get pre-approved for a mortgage before you start the house hunting process. It will help you identify any obstacles to approval, such as having too much debt or a low credit score. It will also help you determine your house-hunting price range. Last but not least, it will make you more competitive in the market, when compared to buyers who haven’t been pre-approved. All of these things well help your cause when it comes time to shop for a home.
You can think of pre-approval as a preliminary review of your financial situation to determine (A) your buying capacity and (B) the level of risk you bring. It is conducted by the lender at the time you apply for a loan, or even before you submit a formal application.
The purpose of the pre-approval process is twofold:
- First, the lender wants to know whether or not you are qualified to borrow money from them. So they will review your credit score, your debt level, your current employment and income situation, and other aspects of your financial picture. That’s the first reason for getting pre-approved by a lender.
- The second purpose is that it helps you understand what your price range is, in terms of the mortgage amount.
You can probably already see why it makes sense to do this before you start looking at houses. But let’s dig further into it all the same…
Why You Should Get Pre-Approved Before Looking at Homes
In most scenarios, it makes sense for home buyers to get pre-approved for a mortgage before they start looking at houses. There’s a certain logic to doing things in this order. After all, the pre-approval process helps you focus your search on the types of properties that you can afford, based on the lender’s willingness to lend.
With that being said, the pre-approval review process is no substitute for old-fashioned budgeting. You should still take a good hard look at your incomes and expenses to determine how much of a monthly payment you can afford. The pre-approval process comes into the picture later, when you’re actually ready to start shopping for a home. You should already have a budget in mind when you move onto this next stage.
There’s another good reason to get pre-approved before house hunting. Sellers (and their real estate agents) will give your offer priority over any other offers that have not been reviewed by a lender yet. In other words, they will take you more seriously as a potential buyer.
It makes perfect sense, when you think about it from the seller’s perspective. The last thing the seller wants to do is accept an offer from someone who is not qualified to get a mortgage loan. You negotiate back and forth. You agree on a price. You take the house off the market (maybe) and wait around for the home inspection. And then you find out the buyer can’t even qualify for a loan. That’s a waste of everyone’s time. So it’s a good idea to get pre-approved before looking at houses, or as early on as possible.
It’s also worth noting that pre-approval is not the same as the final approval. You can still be turned down for a mortgage loan after you’ve been pre-approved by a loan officer. It happens all the time. You can learn more about that here.
“Pre” means that it occurs on the front end of the mortgage process. In order to get a final approval from the lender, you must also go through a rigorous underwriting process. The underwriter will review your loan application and your credentials to determine if you are an acceptable risk for the lender. Only when the underwriter gives a “green light” will you receive a final approval.
Disclaimer: This article answers the question, Should I get pre-approved for a mortgage before looking at houses? Please note that this is general advice that applies in most, but not all, scenarios. Every home buyer is different. So there’s a chance this information might not apply to your particular situation. This article is not meant to take the place of professional real estate advice, but merely to explain the potential advantages of pre-approval.