Getting pre-approved for a mortgage before you make an offer on a house is a smart idea. Why? For one, it can help you get a handle on how much house you can afford. Pre-approval can also help you stand out from the sea of other home buyers in a competitive housing market. In short, it ups that odds that your home-buying journey will be smooth and successful.
Here’s why mortgage pre-approval matters, and how it can give you an edge when shopping for a home.
The meaning behind a mortgage pre-approval
Mortgage pre-approval is a commitment from a lender to provide you with home financing up to a certain loan amount—basically, the stamp of approval that you have the money, credit history, and other credentials to buy a home up to that price.
“Lenders will do a full review of income, assets, and credit in order to issue a pre-approval,” says Sarah Valentini, president and co-founder of Radius Financial Group.
How getting mortgage pre-approval helps you buy a home
When sellers accept an offer, they want the deal to go through. However, if the buyer isn’t pre-approved for a loan, this can put the whole deal in jeopardy—because if the loan doesn’t get approved, the buyer will likely be unable to follow through, says Chantay Bridges with TruLine Realty in Los Angeles.
As such, some home sellers won’t allow buyers to tour their home without pre-approval, and some real estate agents won’t take buyers on tours until they’re pre-approved.
How to get pre-approved for a mortgage: The paperwork you need
Be prepared to submit some paperwork to earn your pre-approval. In general, the paperwork you’ll need to assemble for your lender includes the following:
- Pay stubs from the past 30 days showing your year-to-date income
- Two years of federal tax returns
- Two years of W2 forms from your employer
- 60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts such as CDs, IRAs, and other stocks or bonds
- Any other current real estate holdings
- Residential history for the past two years, including landlord contact information if you rented
Pre-approval vs. pre-qualification: What’s the difference?
Mortgage pre-qualification should not be confused with pre-approval. Pre-qualification is based solely on verbal information you tell a lender about your income and savings, says Valentini. So, it shows how much you could theoretically borrow, but it’s no guarantee—which means these buyers will have to get officially approved for a loan later on and cross their fingers it works out.
Pre-approval, on the other hand, means the lender has already done its due diligence and is willing to loan you the money. Plus, you’ve got an official letter from your lender saying so that will speak volumes to a seller.
A pre-approval provides that extra measure of security to a seller that you are both willing and able to buy the house. As a result, sellers will likely pick you as a buyer over someone without pre-approval since you’re a sure thing, and they won’t have to hold their breath that the deal might not go through.
Bottom line: While pre-approval is a pain, you’ll have to pony up all that paperwork sooner or later anyway. Why not do it on the early side and get a head start on the competition and shop for your dream home with confidence? Here’s how to start the process of mortgage pre-approval.