Unless you are a cash-buyer, a pre-approval letter is your proof of funds. Just think, if you can't buy anything without cash or a line-of-credit and have a good idea about how much you can spend, same concept applies to buying a piece of real estate.
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Getting a mortgage pre-approval before house hunting has many advantages, and in today's seller's market, it's a prerequisite.
Know Thy Number
First, it helps you narrow your home search by giving you a price range. While you should determine your own financial boundaries before talking to a lender, without going through the actual pre-approval process, you won't know what you can afford. Many of my clients start off their home search process like this: They tell me to find homes in the $500,000 - $750,000 range in specific neighborhoods. My first question always is "Have you been pre-approved?" Most of times the answer is "No not yet, but we will get it once we find a home we love." My next question will then be, "What did you base that number off of?" The answers I usually get are"I have good income," "I used an online mortgage calculator," or "We believe that's the amount we can comfortably afford without carrying a large mortgage." The reality is, there are numerous factors that come into play when a lender determines the amount a borrower can get, and depending on which loan program is most suitable for the borrower's current and future situations, the loan amount can also vary substantially. Therefore, without getting a pre-approval, one simply won't know for sure.
Show Thy Worth
The second reason why it's important to get pre-approved is it shows your agent and seller that you are a serious buyer. A good agent usually has a loaded schedule, and will only work with buyers with pre-approval letters in hand. The pre-approval is evidence that the buyer is, again, serious, and most importantly, qualified to make a purchase. In today's market where offers are due the day of or after an open-house, and multiple offers are on the table, an agent would be doing his/her client a disservice if the client is not fully prepared to make a serious offer, and part of that preparedness is getting the client pre-apprvoed for a loan.
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Stay In The Game
The third and often-overlooked reason for getting pre-approved is having a mortgage officer on your side as an advisor throughout the buying process. If you did your homework and picked the right mortgage officer/originator, this individual will become an invaluable resource for you. He or she will teach you the do's and don'ts during the period between pre-approval and closing, provide you with guidelines on down payment, gift funds, and if you are self-employed, what you can do to improve your prospect as a borrower. What's more, your loan officer will work closely with your agent to help you secure the property of your choice.
It's never too early to start a conversation with a mortgage officer. Even if you are not ready to make a purchase in the next year or two, the mortgage officer will arm you with enough knowledge to help prepare you for the purchase. Making an early connection also means you will be notified of any loan program that may work to your advantage.
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Bottom Line
With all the advantages of obtaining a pre-approval vs. the opportunity cost of not obtaining one, it's a no-brainer that anyone who is seriously considering buying a home should start shopping for a lender first!
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