Over the past several months I've had the opportunity to speak with a number of potential home buyers and one of the questions that always comes up early in the conversation is about the pre-approval. The questions usually range from what exactly is the pre-approval to when is the right time to get pre-approved?

You may have been told, heard, or read somewhere that getting pre-approved at the beginning of the home buying process is extremely important, but why is that and what exactly does getting pre-approved mean?

Continue reading below, or watch the following video, to learn more:

Many of the potential buyers that visit my website or call in, are early in the process and just wanting to get an idea of what's currently available for sale and what homes cost in the area they are interested in. When we have a conversation on the phone the pre-approval always comes up as a topic of discussion.

Why Get Pre-Approved Early in the Process?

There are several reasons to start the pre-approval process early in the home search, but the main one is the pre-approval process answers many of the questions potential homebuyers have upfront regarding credit scores needed to qualify for a mortgage, down payment amount required, income needed, monthly payments, etc.

This is especially true in today's market. Home prices are rising and buyer competition is fierce so it's important to not only have a clear understanding of what your budget is but what price range you should be searching in to accommodate potential bidding wars.

While online mortgage calculators are a great place to start, they are not going to accurately factor in all of the monthly costs that go along with buying a home including property taxes, HOA fees, homeowners insurance payments, etc. Lenders will also require that you have a certain amount of money “in reserve”, that's money available in savings after the closing of the home. Think of it as a required rainy day fund.

A Pre-Approval Will Provide Clarity

Having a pre-approval will not only allow you to be more intentional but will also make you more competitive. Until you actually go through the process you're basically guessing about what price range you should be looking in.

There are several different loan programs available and many have different down payment requirements, different qualifying credit score requirements, and different debt to income ratios allowed. Until you’ve worked through all of the different scenarios with a lender you won’t know which option is best for you. Having this information will allow you to shop with a lot more confidence and when you do find the right home, it's going to let the seller know that you're a serious buyer.

One potential challenge when you are just starting to casually browse for a home is that invariably the absolute perfect home gets listed, it's your dream home. You're like, this is it, this would be the absolute perfect home for us, but ask anyone that's been shopping for a home lately and you're likely to hear stories of anguish and frustration. Homes are selling quickly, in a matter of days in many instances, and because you’re not ready to go you can't do anything. If you decide to go ahead and write an offer on that home, the seller is not going to give it any serious consideration because you would not be considered a solid, serious, legitimate buyer as you don't have your financing in place. So the seller, especially in current market conditions, is not going to take the home off the market and risk losing out on another potential buyer while you're getting your pre-approval done. It usually only takes a few days, depending on how fast you can return all required information to the lender, but by the time you get the pre-approval back, there's a good chance the home will no longer be available. Having your financing in place upfront is a really important first step.

Freddie Mac explains:

By having a pre-approval letter from your lender, you're telling the seller that you're a serious buyer, and you've been pre-approved for a mortgage by your lender for a specific dollar amount. In a true bidding war, your offer will likely get dropped if you don't already have one.

What if You’re Not Looking to Buy for a Few Months?

Even if you're not looking to buy for four, five, or six months, it doesn't hurt to go through the process. Connecting with a lender will make sure you’re ready when the time is right. I’ve seen situations where something unexpected, that you’re unaware of, pops up on a credit report. The lender can help get those unexpected negative credit items removed and even offer suggestions to help you boost your credit score if needed. Making sure there are no unknown issues will put you in the best position to obtain the lowest overall interest rate and more favorable terms.

Bottom Line

In this competitive market with low inventory, multiple offers, and bidding wars, the pre-approval letter is an absolute must. My recommendation is that you go through the process and get pre-approved as soon as you start thinking about buying a home. It's a lot easier a couple of months, or six months, down the road for the lender to update the pre-approval with new information than to start from scratch.

Completing the process will give you a much better idea of exactly what you can afford, what the monthly payment will be, and how any potential changes in interest rates over the next several months impact the total pre-approval amount and monthly payment.

Hopefully, this helps and if you have any additional questions about the pre-approval process, or would like to be connected with a lender, please don’t hesitate to reach out.