Why Pre-Approval Should Be Your First Step When Buying a Home
With more homes on the market and mortgage rates gradually decreasing, you might be thinking it’s the perfect time to dive into homeownership. But before you start browsing listings, one essential step should be at the top of your to-do list: getting pre-approved for a mortgage.
Pre-approval is when a lender reviews your financial information—like your W-2s, tax returns, credit score, and bank statements—to determine how much they’re willing to lend you. After this evaluation, you’ll receive a pre-approval letter, which outlines how much you can borrow. Here are two key reasons why pre-approval is critical in today’s real estate landscape:
1. Pre-Approval Helps You Understand Your Financial Limits
While home affordability is beginning to improve, it’s still a tight market. That’s why it’s important to sit down with a lender and review your loan options, especially as mortgage rates continue to fluctuate. Pre-approval is the perfect time to assess your financial situation. Not only does it give you a clear understanding of how much you can borrow, but it also provides clarity on your overall budget.
As Investopedia explains:
“Consulting with a lender and obtaining a pre-approval letter allows you to discuss loan options and budgeting with the lender; this step can clarify your total house-hunting budget and the monthly mortgage payment you can afford.”
Using this information, you can focus your home search on properties within your financial comfort zone. While the recent dip in mortgage rates might allow you to afford more than expected, it’s important not to overextend. As CNET warns:
“In many cases, a lender may preapprove you for more than you need to spend on a home. And while it can be tempting to look at houses outside your budget, it won’t help you in the long run. Before you start touring homes, figure out how much you can realistically afford and stick to your budget.”
2. Pre-Approval Strengthens Your Offer
Once you find a home that fits your budget, having pre-approval offers another major advantage: it strengthens your offer. It shows sellers that you’ve already gone through a thorough review of your credit and financial status. This makes you a more attractive buyer, increasing the likelihood that your offer will be taken seriously.
As Greg McBride, Chief Financial Analyst at Bankrate, puts it:
“Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns, and bank statements. A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”
With mortgage rates decreasing, more buyers are likely to enter the market soon. While demand is currently moderate, competition could heat up again, especially in high-demand areas. By getting pre-approved, you’re positioning yourself to stand out from the crowd when you find your dream home.
The Bottom Line
If you’re gearing up to buy a home, make pre-approval your first move. It not only gives you a clearer picture of your borrowing power but also signals to sellers that you’re a serious buyer. Stack the odds in your favor and ensure you’re ready to make a strong offer when the right home comes along.