I'm in the market for a new home, and everyone I talk to, from friends to financial advisors, suggests I get pre-approved for a mortgage before I start house hunting. Why is this so important?
You're actually on the receiving end of great advice. When looking to take out a large loan, whether it's for purchasing a home or buying a car, having that pre-approval in hand before you start your search is crucial.
Depending upon the type of loan, the process of getting pre-approved for a loan can take time. The lender will begin by asking for your financial history and other personal information. If you have a co-borrower, the lender will need this information about them as well.
You'll be asked to provide your Social Security Number (SSN) and for permission to allow the lender to access your credit report. If the information you provide is satisfactory, as is your credit report, the lender will begin constructing the details of your loan. When they have determined how large of a loan you will be eligible for, they will grant you a preapproval letter. The letter will also detail your estimated interest rate on the loan, though that will sometimes also depend upon the specifics of your purchase, such as the year and condition of a car or appraisal on a home.
Having your preapproval letter will shorten the loan process significantly when you're actually ready to take out the loan. However, that is only a small benefit of getting pre-approved before you start "shopping."
Here are some other advantages of getting pre-approved for a loan:
1.) You'll know what you can afford
Your pre-approval will tell you exactly what you can afford. This way, you'll avoid being disappointed later when you have your heart set on a certain home only to be told you can't swing it financially. Knowing how large a loan you'll qualify for will simplify your search and get you into your new home or car sooner.
Be sure to calculate other monthly costs, such as property taxes, home insurance and increased auto insurance rates when determining the actual amount of money you'll need to shell out each month.
2.) Don't get taken for a ride
Picture this scene at a car dealership:
So, you're here to buy a new car! What are you looking for?
Well, I want something with a smooth ride and -
Got it. And how much of a monthly payment can you afford?
Well, I think I can swing up to $200 a month, but I'd rather something closer to $150 if you --
Step right this way please! Let me show our new line of Camrys at just $205 a month! They have the most luxurious feel and the ride is smooth as butter!
What happened here is, quite simply, a salesperson looking to make the most money out of a customer. When you're unsure about how much you can spend, the dealer will capitalize on your uncertainty and try to sell you a car that just barely skims the maximum amount you've decided you can afford.
Also, when you name a monthly payment you can manage, the dealer will work with that number instead of talking about the price of the car. They may try to inflate the payment with charges and fees just because they fit within your named payment amount.
In contrast, when you show up at the dealer with a preapproval in hand, the salesman will have to show you cars with price tags that fit within your loan amount.
Don't get taken for a ride; get your preapproval before you set foot in the dealer shop!
3.) Be taken seriously
A car dealer will take you a lot more seriously when you wave that pre-approval in their face, since having that information in hand shows you're ready to buy.
When purchasing a home, the same rule holds true. A realtor will be able to assist you more efficiently when you know exactly how much house you can afford. They may also give you better service since you're showing that you're serious about buying a home. In fact, many realtors refuse to show homes to buyers who don't have a pre-approval in hand.
4.) Know you have financing you can trust
When you show up at the car dealership with a pre-approval from your credit union, you know the deal is in your best interest. Many auto shops have access to several financing options and they're almost always going to put customers into financing options that are in their own wallet's best interests.
5.) Purchase your dream home
A pre-approval makes you a valuable customer. It also helps you stand out from the pack. If you're looking to buy a home in a competitive market, you may be competing with several other buyers for the same house. Having your preapproval will give you a leg up on bidding wars. A seller will be more eager to work with someone who's already started the mortgage process. You can end your search sooner with a preapproval!
Ready to get pre-approved? Send me an email at firstname.lastname@example.org or give me a call at 330-664-4708. I also offer free one-on-one Mortgage Classes as a credit union benefit if you aren't quite ready to apply but want to prepare yourself to down the road.
Mortgage Loan Officer, Everyday Finance Contributor