Forget Your Pre-Approval Letter
Most home buyers know they should get a mortgage pre-approval letter from a
lender before they begin seriously shopping for a home. But the reasons
for this advice aren't always clear, and buyers sometimes are dismayed by
the amount of paperwork involved. Here is some of the reasoning behind the
1. A preapproval letter is more reliable than a prequalification letter.
Getting a prequalification letter is easy. You just call a mortgage broker
or lender, provide some basic financial information, then wait a few
minutes for the letter to come through your fax machine. Getting a "prequal"
from a Web site is just easy. Enter some information, click "submit" and
A preapproval letter, on the other hand, involves verification of the
information. Rather than taking your word on faith, the lender will ask
for documentation to confirm your employment, the source of your down
payment and other aspects of your financial circumstances.
Granted, a pre-approval is more time-consuming (and possibly more
stressful) than a prequalification. The additional due diligence is
exactly why the pre-approval carries more weight.
Pre-Approval Versus Pre-Qualification: Is There A Difference?
2. You'll know how much money you can qualify to borrow.
Most home buyers have a rough idea of how much they would feel comfortable
paying every month on their mortgage. However, there's no quick-and-dirty
way to translate that monthly payment into a specific maximum mortgage
amount because other factors - down payment percentage, mortgage
insurance, property taxes, adjustable interest rates and so on - are part
of the calculation. And, you might not be qualified to borrow as much as
you think you should be able to borrow, depending on your income, your
debts and your credit history.
3. You'll have more leverage in negotiations with the seller.
Sellers often prefer to negotiate with pre-approved buyers because the
sellers know such buyers are financially qualified to obtain the financing
they need to close the transaction. A preapproval letter is an especially
favorable point in a close multiple offer situation. And, you might feel
more confident about making an offer with a pre-approval letter in hand and
the knowledge that you'll be able to obtain a mortgage.
4. Your real estate agent will work harder on your behalf.
A pre-approval letter signals to your real estate agent that you're a
well-qualified buyer who is serious about purchasing a home. The increased
likelihood of a closed sale - and a commission--will naturally motivate
your agent to devote more time and energy to you. In fact, some agents
won't even show property to buyers who don't have a pre-approval letter.
Motivating Your Agent to Find the Home of Your Dreams
5. A few caveats:
Pre-approval letters aren't binding on the lender, are subject to an
appraisal of the home you want to purchase and are time-sensitive. If your
financial situation changes (e.g., you lose your job, lease a car or run
up credit-card bills), interest rates rise or a specified expiration date
passes, the lender will review your situation and recalculate your maximum
mortgage amount accordingly.