by Marco Di Gabriele
Last week I was talking with my friend Eric who told me that he's looking to buy his first home in Philadelphia. He said that he was "probably looking to spend around $200,000." The next question that I asked him was... "are you pre-approved?"
If you've thought about buying property, at some point someone has probably told you that you need a pre-approval.
When Eric said that he wasn't pre-approved, I told him that if he's actually considering buying, then he needs one.
Why?
A pre-approval is essentially your ticket into the the home-buying arena.
A pre-approval is your assurance that you actually qualify for a mortgage to buy a home. When you receive a pre-approval, it means that a lender has taken your preliminary loan application through a process to ensure that when you actually apply for a mortgage, they will be able to give you one.
Why is this helpful to you?
1) It tells you what you can spend
When Eric told me he wanted to spend $200,000, he was telling me what he thought he could afford to spend on a home. In reality, he may be able to spend more or less than that. Despite doing tons of research using the "Zillow Mortgage Calculator", it's really difficult to truly understand your price-range without speaking with a lender.
It makes sense to speak to a lender about getting pre-approved because they will be able to give you the best idea of what you are able to spend based on a variety of factors including your income, credit, downpayment amount, etc. If you don't have an accurate estimate of what your price-range is, then you won't know where to start looking.
2) Most realtors will only work with buyers who are pre-approved.
Eric is one of my best friends, so even though he isn't pre-approved, I don't mind showing him a few properties here and there.
In most cases, without a pre-approval you won't actually be able to find a realtor who will work with you. Realtor's don't get paid for doing showings, they only get paid when they sell a property, so if you aren't qualified for a mortgage, they may not want to spend time showing you houses.
Having a pre-approval shows your realtor that you are serious about purchasing a home and also qualified to do so.
3) The offer for your perfect home will not be accepted without a pre-approval
If you are able to find a realtor to work with, or if you're lucky like Eric, and have a friend who is a realtor, you should still get pre-approved! Why? Because if you do end up finding the perfect home when you're out looking, in most cases you won't even be able to put in an offer without attaching your pre-approval letter.
If you start the process of getting pre-approved after you've found the home you want to buy, there is a chance that by the time you receive your pre-approval letter, the home will already have been purchased by someone else.
Pre-Qualification vs Pre-Approval
A pre-qualification is only a loan agent's opinion that you'll be able to obtain financing. No verifications are made, so formal approval is not issued. On the other hand, a pre-approval means that the loan application has been taken through a rigorous procedure. Make sure that the lender you are working with is not only giving you his opinion that you can obtain financing, but actually running your application to make sure that you will be able to qualify for a loan.
