If you’re thinking about buying a home, a pre-approval tells you how much you’ll be able to borrow – and what kind of price range you can afford to look at. You go to your bank or mortgage broker, they look over your finances – and let you know how much they’ll lend you and what interest rate you’ll pay. That pre-approval is locked in for 120 days.
1. A pre-approval helps you get real about what you can afford
Online mortgage calculators can give you a ballpark idea based on your income, but they don’t take all the important factors into account – like how much debt you have. In fact, people often don’t even know themselves how much debt they really have. Most don’t think of the $200 a month that’s going towards that financed couch, or the monthly payment on their car. But every bit of debt impacts what a lender will be willing to let you borrow.
When you go to a mortgage broker or lender to get pre-approved, they go through your credit with a fine-tooth comb. They’ll ask about things you haven’t thought of, like credit card debt, line of credit, student loans, and financed purchases.
2. It’ll save you time and hassle
If you’re not pre-approved, visiting properties is like swimming with one arm tied behind your back. Having your financing in place shows you’re serious about buying and aren’t just being a "real estate tourist." Plus, it gives you an exact idea of what you should be looking at and where, which means you avoid seeing a bunch of places that aren’t for you.
3. It narrows down your search
Maybe the pre-approval shows that a 2-bedroom isn’t in the cards for you right now, so you’ll know you should be focusing on 1-bedrooms or 1-plus-dens. Having this information before you start looking will help you avoid the inevitable disappointment of falling for a place you can’t afford.
4. It gives you a competitive edge
We’re in a market where there’s very little inventory, but lots of buyers – which means you could face competition out there. If you have to go back to your bank and ask, “Can I get a loan for this amount,” you’ll probably be out of the running, because the winning bid will be the firm one that’s already been pre-approved. Guaranteed.
5. It tells you how high you can go
Multiple offer situations can get pretty intense, and knowing exactly how high you can go without getting carried away in a bidding frenzy is really important. You may have set your budget at $800K, but then you get into the fray and decide to offer $900K and not worry about the consequences...until you lose the house (and probably your deposit) when the bank says no. Being pre-approved means you know exactly how high you can go and how much wiggle room you have in a bidding war.
6. It makes you a more desirable buyer
Sellers like firm offers. That’s just a fact of life. If your bid is close to someone else’s, the seller is a lot more likely to go with the firm offer.
So bottom line? If you’re serious about buying, get pre-approved, stat. In this market, you need to have financing in place before you can get an offer going. But going through the process also tells you how much you can afford, manages your expectations – and sets you up to find (and buy!) a condo you’ll love.