After you’ve assembled your home team, and are confident you can afford your home purchase, your next step is to work with your lender to get pre-approved. Most likely, if you are reading this book, you are one of the vast majority of people who will be paying for a home with a mortgage. Getting pre-approved is the quickest and easiest way to make the process easier for you and everyone else involved.
When to get pre-approved
Many new homebuyers ask me whether they should get pre-approved prior to looking at homes. My answer is ALWAYS, 100% “yes you should”. There are several important reasons for this:
- It gives you a budget: Usually along with a pre-approval, your lender will give you an idea of the highest dollar amount that you will qualify for. They can also give you an idea of what monthly payments will look like at different price points and with different down-payments. You can use that information to craft your home search to make sure that you’re only looking at homes that you qualify for and that you can afford.
- Sellers take you seriously: When a seller puts their home on the market, they don’t want to open their home up to a bunch of what we call in the business “lookie loos”, or people who are not serious about buying. They only want to show their home to people who are most likely to purchase it. As a result, often sellers will require buyer’s agents to represent to them that their buyer is pre-approved. If you don’t do this prior to shopping around, it significantly limits the number of homes that you can see.
- It gives everyone involved confidence: How would it make you feel if, after finding and purchasing your dream home, the transaction blew up the day before closing because your lender found out that you could not qualify for a mortgage to purchase it? It would be devastating. Not just for you, but for the seller who thought they would be able to move on to their next home. In fact, it is doubly impactful for some sellers, as they may have purchased a new home themselves that they now cannot close on. It also impacts all the real estate professionals involved, who did all of the important work of getting you to the closing table for nothing.
Because no one wants to go through that, most sellers will not even consider an offer on their home unless it is accompanied by a pre-approval. And many realtors will not even show you homes until you have gotten pre-approved as well. It’s that important. Although a pre-approval does not guarantee that your transaction will stay together, it moves the certainty of closing successfully well into the 90% range.
How to get pre-approved
In today’s technology age, getting pre-approved is easier and more convenient than ever. Once you have selected the lender that you would like to work with, ask them if they have a web portal for their pre-approval process (or Google it, many lenders have this as part of their online marketing). Just click on the link to that portal and get started!
Make sure when you begin that you have a good 15-30 minute chunk of time to dedicate to the task (though usually you can save your progress and come back to it at any point). There are also a few items that you’ll want to have handy. Your pre-approval generally depends on your income as well as any debt obligations that you have. So you will want to have some proof of those things. You may need to scan these items into their web portal, or at least enter the numbers on those documents into online forms.
- Income: You don’t necessarily need your tax returns, W-2s, or 1099s at this point. But you will want to find your last paystubs if you are a W-2 employee. Or if you are a 1099 employee or sole-proprietor, you’ll want to find your profit and loss statements or something similar that shows how much money you make.
- Debts: Usually the most recent statement for that debt obligation will be sufficient. Debts include utility payments, auto loans, rent or mortgage payments, credit cards, and anything else with a balance that you owe.
- Assets: The lender will also want to know what sort of assets you have, as they will need to know how you intend to pay the down-payment and earnest money we described above. For this you will need your most recent month’s bank statements, as well as statements for any retirement or investment accounts, annuities, and any other property that has potential cash value.
What about my credit score?
The most common reason I hear why a buyer decides not to get pre-approved is that they are worried about the impact doing so will have on their credit. A pre-approval does depend, in part, on whether you have a healthy credit score. And it is true that having multiple inquiries into your credit (or “credit pulls”) can negatively impact that score.
While I understand this concern, the pre-approval process is critical to your ability to buy a home. Not only that, but most lenders will do what is called a “soft pull”, where they are able to see your credit score without doing a formal credit inquiry. Thus the pre-approval will not impact your credit score much, if at all. A formal credit inquiry is not done until much later in the process. And if you are in a position where a credit pull could cause you to fall below the standards where you could qualify for a loan, your lender will have a strategy for how to deal with that. So this is just one of those things in life where the risk is outweighed by the benefits.