Why pre-approval?

We're talking about what a home seller wants to know: Do you have the resources to follow through on your offer? Short of a certified check, a pre-approval commitment is what you want. Here's why.

1. Pre-approval requires verification (pre-qualification doesn’t).

It’s easy to get a “pre-qualification” letter, and for that reason it carries little weight. Anyone can get one: all one needs to do is to provide a lender or broker some basic financial information. Based on the information provided, the lender will quickly provide the letter. But because no documentation is required for this letter, it can’t really be trusted. A pre-approval letter, on the other hand, requires verification of your employment, the source of your down payment, and other evidence of your financial health. Even though it takes more time and effort, a pre-approval letter will pay for itself down the road.

2. You'll know how much you can borrow.

You know how much you would feel comfortable paying every month on your mortgage. But that doesn’t help you know exactly how much you’ll need to borrow for that mortgage. Other factors come into play, including the percentage of your down payment, mortgage insurance, property taxes, home insurance, adjustable interest rates and others. Your income, your debts, and your credit history also factor in how much you’ll be able to borrow.

3. You'll be in a better position to negotiate with the seller.

Sellers take pre-approved buyers more seriously because they know the financing will be available. You’ll feel more confident in making an offer because you’ll know you’ll be able to obtain a mortgage.

4. Your real estate agent will work harder for you.

Because you’ve taken the trouble to obtain a pre-approval letter, your real estate agent will know you’re well-qualified and serious about buying a home. Pre-approval letters are so important that some agents will not even show property to buyers who don’t have them.

5. Caveats:

If you lose your job, buy or lease a car or run up credit-card bills; if interest rates rise; or if a specified expiration date passes, the lender will review your situation and recalculate your maximum mortgage amount accordingly. It’s smart not to spend anything until you have received your financing.