In my recent article, "5 Common Mistakes First-Time Homebuyers Make in Xenia," mistake number one was beginning the home search before getting preapproved.
It is easy to understand why buyers want to start looking at homes right away. House hunting is exciting. But before you begin seriously touring homes, it is important to understand what you may qualify for, what monthly payment fits your budget, and whether there are any financing issues that should be addressed first.
Because preapproval can affect your price range, your monthly payment, and your ability to make a strong offer, this important step deserves a closer look on its own.
Preapproval vs. Prequalification: Not the Same Thing
Lenders may use the terms prequalification and preapproval differently, so the label alone does not always tell you exactly how much financial information was reviewed. What matters most is understanding the lender's process and what was evaluated before the letter was issued.
| Prequalification | Preapproval |
|---|---|
| Often provides an early estimate of how much you may be able to borrow | Generally involves a more detailed review of your financial information |
| The amount of information and documentation reviewed can vary by lender | May involve review of income, assets, debts, credit, and supporting documentation |
| Can be useful when you are beginning to explore your financing options | Can indicate the amount a lender is tentatively willing to lend, subject to conditions |
| May help you understand your early buying range | Can help demonstrate to a seller that you have taken steps toward obtaining financing |
Because lender processes vary, ask exactly what information was reviewed before the letter was issued. When you are preparing to make an offer, your lender and Realtor can help you determine what financing documentation should accompany the offer.
1 It Helps You Understand Your Buying Power
Preapproval is not only something you obtain for a seller. It is also an important planning tool for you. Once a lender reviews your income, debts, credit, and other financial information, you will have a clearer idea of the price range and loan amount you may qualify for.
Your lender can also provide an estimate of what your monthly payment may look like based on the loan program, interest rate, taxes, insurance, and other applicable costs.
Worth remembering: The maximum amount a lender approves you for is not necessarily the amount you should spend. Your own household budget should determine the monthly payment you are comfortable carrying.
2 It Can Make Your Offer Stronger
When you are ready to make an offer, a preapproval letter can show the seller that you have already taken important steps toward obtaining financing.
In a competitive situation, an offer from a preapproved buyer may be viewed more favorably than an otherwise similar offer from a buyer who has not yet spoken with a lender.
A preapproval does not guarantee final loan approval, but it can demonstrate that you are serious and financially prepared to move forward.
3 It Can Identify Financing Issues Early
The preapproval process may uncover issues that are better addressed before you find a home.
These could include a credit-report error, a higher-than-expected debt-to-income ratio, insufficient documentation, or questions about income or available funds.
Discovering an issue early gives you time to speak with your lender and determine what steps may be needed before you begin seriously shopping for a home.
4 It Helps You Be Better Prepared Once You Find a Home
Once you find the right home and your offer is accepted, your lender will still need to complete the required loan-processing and underwriting steps.
However, because you have already provided financial information during the preapproval process, you may be better prepared for what comes next and less likely to encounter an unexpected financing issue at the beginning of the transaction.
What Getting Preapproved Actually Involves
A lender will typically ask for:
- Recent pay stubs and W-2s or tax returns
- Bank and asset statements
- Permission to pull your credit report
- Information on current debts
- Identification and, if applicable, documentation of other income sources
From there, the lender reviews your information and may issue a preapproval letter indicating the amount the lender is tentatively willing to lend, subject to the lender's conditions and final loan approval.
A Note on Credit Inquiries
If you are comparing mortgage lenders, do not let concern about multiple credit inquiries prevent you from shopping around. Mortgage-related credit inquiries made within a relatively short rate-shopping period are generally treated as a single inquiry for credit-scoring purposes, although the exact time period can vary depending on the scoring model. Ask the lender when a credit check will be performed and try to compare lenders within a concentrated period of time.
When Should You Get Preapproved?
Ideally, speak with a lender before you begin seriously touring homes.
You do not necessarily need to be ready to make an offer tomorrow. Getting preapproved ahead of your search can give you time to understand your financing options, address questions, and establish a comfortable price range before you begin looking.
Because lender requirements and the length of time a preapproval remains current can vary, ask your lender how long your particular preapproval will remain valid and when updated documentation may be required.
Final Thoughts
Preapproval is not simply another piece of paperwork in the homebuying process. It can help you begin your search with a clearer understanding of your financing, your price range, and the monthly payment you may be taking on.
If you are considering purchasing a home in Xenia or elsewhere in Greene County, speaking with a qualified mortgage lender before seriously house hunting can be an important first step.
Once you understand your financing options, I can help you move into the next part of the process, identifying homes that fit your needs, your preferred location, and your budget.
Ready to start preparing for homeownership? Contact me for my free First-Time Homebuyer Guide or to talk about the homebuying process and the next steps in your search.
Educational Notice: Mortgage preapproval requirements, credit scoring practices, and lender policies vary and may change. Buyers should speak directly with a licensed mortgage lender for guidance specific to their financial situation. This article is provided for general educational purposes and is not legal, tax, financial, mortgage, or lending advice.