There are many myths in real estate. From how mortgages work to the expected value of properties, our industry can be loaded with misconceptions and false ideas.
One of the most common myths has to do with mortgage pre-approval. This is an important first step in your real-estate search, but it can be overlooked.
Quick Note: Difference Between Pre-Approval and Pre-Qualification
There is an important point that we should clarify first: the difference between pre-qualification and pre-approval. Pre-qualification is a common first step, and it essentially means having a lending agent quickly go over your financial numbers and provide an initial qualification for the loan. You simply provide numbers, but nothing has to be verified for this first step.
A pre-approval, however, is more detailed and exhaustive, and falls just short of an official loan offer. It verifies your information, including savings, income, credit history, and more.
Basically, pre-qualification says “if these numbers are true, you can get a loan.” A pre-approval says “if these numbers, which we have verified, stay the same, you can get a loan.”
Usually, people go through this process: (1) get pre-qualified, (2) shop for homes, (3) choose a home, then (4) get pre-approved. But, despite a common myth, you can get pre-approved first.
Myth: Find a Home First, Then Get Pre-Approved
Many buyers simply want to rush out and shop for a home. They feel that financing is essentially guaranteed, so the best step is to start looking at properties, contacting real estate agents, and visiting for-sale homes. If they are patient, they may get pre-qualified first, but complete pre-approval is rarely done.
This myth essentially states that initial pre-approval really doesn’t matter until you find a home; what does matter is finding the perfect home. Everything else can wait, the myth implies. Unfortunately, this myth is common, but if you slow down and understand the benefits of pre-approval, you’ll see that the best first step in your home-buying process is actually to get pre-approved for a mortgage.
Truth: You Can Get Pre-Approved (Not Just Pre-Qualified) First
The reality is, getting pre-approved is a wise first step. It’s not necessary, but there are numerous advantages.
When you get pre-approved first, you go through most of the important steps for a mortgage long before you even make an offer on a house. This might seem time-consuming and needless, but it can bring significant advantages to your entire home-buying process.
Advantages of Getting Pre-Approved First
Better Understanding of Your Budget
Having a budget is important when it comes to buying a home. (Or buying anything of significant value, for that matter!) With pre-qualification, you can get a general idea of your borrowing potential, but with pre-approval, the picture of how much you can purchase is much clearer.
This is important for a variety of reasons. For one, you can narrow your search only to homes that you can afford and avoid wasting time (including your time, the seller’s time, and the agent’s time) looking at homes that are above your budget. It also helps manage expectations, as you can know (within reason) what types of homes you can purchase; you won’t get your hopes up on homes that are above your budget, which can be devastating.
Shows Buyers You Are Serious
Getting pre-approved may be most important in a highly-competitive market. If homes are selling rapidly, it can seem almost impossible to separate your offer from the crowd, especially if the seller is looking at dozens of other options.
Sale price obviously motivates sellers better than anything else. But to gain an edge without overpaying, you could get pre-approved. This will send a message to the seller that you are motivated and ready to buy. They’ll know your offer is legitimate, and, because your are already pre-approved, there is almost no chance that you won’t get financing, which is probably the most common snag for real estate offers.
So if you want to increase your chances of winning the home, especially in a highly-competitive market, you should get pre-approved. This can help your competitive edge in the market and could be the difference for finally making a purchase.
Helps You Understand the Costs
Homebuyers, especially first-time homebuyers, may not understand the costs of a mortgage. These include title insurance, mortgage closing costs, homeowner’s insurance, and escrow fees. Depending on the loan, there will likely be downpayment requirements.
While you can get a general idea of the overall costs, getting pre-approved for the loan will give you a more accurate, specific figure. This can eliminate any unwelcome surprises, and could help you budget for future homeowner expenses such as repairs, landscaping, new appliances, and technology upgrades.
Time from Choosing a Home to Closing a Sale is Shorter
Closing a sale takes time. You need to run through various steps, including inspections, appraisals and, of course, finalizing the mortgage. If you have handled of pre-approval beforehand, you can skip at least one of these exhaustive steps.
The aspects of a pre-approval vary depending on the loan product, the lender, and the borrower, but they usually include credit checks, confirmation of income, and more.
Yes, you’ll still need an appraisal, and the home should still be inspected before your purchase, but with pre-approval handled, you can move just a little bit faster. (By the way, this speed to close is also attractive to sellers, further enhancing your offer.)
Get Pre-Approved Right Away!
If you are ready for pre-approval, contact Home & Mortgage today. We’ll use a common-sense approach to underwriting so you can get the right loan for your specific goals and budget.
From first-time buyers to seasoned investors, we are here for all your real-estate borrowing needs!