Why a Pre-Approval is Your First Step when Buying a Home

Home buyers should enter the marketplace with more than a vague idea of their borrowing ability. They should seek a written statement from a mortgage lender or mortgage broker before negotiating to buy a house, that they would qualify to purchase a home for up to a stated maximum price with a specified down payment.

“Pre-approvals” are usually based on the consumer supplying detailed creditor information, but are always contingent on the consumer’s credit information proving accurate and satisfactory at the time the consumer actually applies for the loan and the property purchased being worth enough to support the required LTV ratio.  Often, pre-approvals are only good for a certain number of days (e.g., 60 or 90 days) and don’t set a definitive interest rate unless the consumer has paid for a loan “lock in.”

In a tight housing market, consumers making offers “subject to financing” who have a pre-approval letter have a competitive edge over those who don’t.

Some consumers mistakenly avoid the pre-approval process by meeting with a friendly officer at a bank or mortgage company, disclosing their financial situation, and obtaining a loan officer’s informal estimate of how much money they could expect to borrow. Some lenders offer quick over-the-phone tentative approvals, forgoing any elaborate pre-approval process, sometimes referred to as “pre-qualifications.” These informal approvals may comfort home seekers, but aren’t likely to convince sellers of the Buyer’s creditworthiness.