originally published by Better.com
Buying your first home is exciting, but it can also feel daunting — especially in a hot market, where offers are flying and homes are going on and off the market in a matter of days.
One of the best tools in your homebuyer toolkit is a pre-approval letter. It shows sellers that you’re likely able to secure financing, and that they can take your offer seriously. And most importantly, it helps you focus your search by giving you an accurate picture of how much house you can comfortably afford.
What is pre-approval?
Essentially, pre-approval is a snapshot of what you’re likely able to borrow for a home. It’s based largely on information you provide to a lender, so the final amount could change somewhat once you’ve gone through the full underwriting process, where an underwriter verifies all of the necessary information to understand what you’ll be able to comfortably borrow.
A Better Mortgage pre-approval takes as little as 3 minutes and asks you a few brief questions about things like how much income you have, how many assets you have available, and how much debt you owe. To get an accurate picture of what you can afford, it’s good to be as accurate as possible when answering these questions — accuracy here will ensure your final approved amount doesn’t end up being significantly different from your pre-approved amount.
Pre-approval also usually involves a credit check. Most lenders run a hard credit check which can impact your credit score by up to 5 points. A Better Mortgage pre-approval uses a soft credit check which does not impact your credit score. This means that even if you’re just starting to think about buying a home you can see how much you’ll be pre-approved to borrow with peace of mind that your credit score won’t take a hit.
Who is pre-approval for?
We recommend that every homebuyer get pre-approved. Even experienced homebuyers with proven credit and significant assets will still benefit from having a pre-approval letter to show sellers their offers should be taken seriously.
The one exception is cash buyers, who of course do not need any mortgage approval processwhatsoever. It’s worth noting that even if you don’t have the entire purchase amount in cash, you can work with a company with a program that gives you the resources to make a cash offer, such as the Better Cash Offer Program.* These programs allow you to use the lender’s cash to make a cash offer on the home, then convert to a traditional loan after underwriting is complete. Since cash is so attractive to sellers, this can make a big difference in your likelihood of winning the offer beyond what even a pre-approval letter can do.
When should you get pre-approved?
Since most lenders only run a soft credit check for pre-approval, you can get pre-approved at any stage in the process — even if you’re just starting to think seriously about buying a home. One of the biggest benefits of pre-approval is that it tells you how much a lender is willing to offer you for a purchase, which can help you frame your thinking around what kind of home to start looking for.
That said, it’s important to keep in mind that pre-approval letters are typically valid for 90 days — so if you plan to start making offers in the near future, it’s wise to keep that 90-day window in mind.
The other timing consideration has to do with the information you’re able to provide. If you anticipate an increase in your income, a payoff of a debt, or a detractor on your credit report falling off in the near future, it’s worthwhile to wait for those things to pass before getting pre-approved. It may significantly impact the amount you’re pre-approved for.
Why is pre-approval important?
Imagine someone’s selling a home for $350,000, and they receive two offers: One without a pre-approval letter from a lender, for $375,000, and one with a pre-approval letter for the list price of $350,000. The higher amount is enticing, but they have no way of knowing if the person making that offer can actually pay that amount for the home. The lower one, on the other hand, is backed up by a lender who has said “Based on what this person has told us, this person is pre-approved for a mortgage to buy your home.”
That’s the power of pre-approval. Even if your offer isn’t the highest, it proves that you’re likely able to complete the purchase and therefore gives you a much higher chance of winning the home.
How do you get pre-approved?
Depending on the lender, it could be as simple as a few questions online or as complex as an in-person appointment with a series of paper forms to fill out.
Many lenders are moving to an online pre-approval process, but most still require in-person paperwork further along in the underwriting process.
WIth Better Mortgage, you can get pre-approved online in as little as 3 minutes, and have your pre-approval letter in-hand immediately. If you continue with Better Mortgage to get your loan fully approved, your pre-approval flows seamlessly into our fully digital mortgage approval process, where you’ll have a dedicated support person and an online portal where you can view, download, and upload documents all in one place.
