What Does Mortgage Pre-Approval Mean? A Major Advantage When Buying a Home

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Getting pre-approved for mortgage financing before you make an offer is a smart move. Why? It can help you determine how much house you can afford. Pre-approval can help you stand out among the thousands of home buyers in a highly competitive housing market. It increases your chances of a smooth and successful home-buying experience.

What is mortgage pre-approval? How it can help you when you are looking for a home.

The meaning behind a mortgage pre-approval

Mortgage pre-approval is a commitment from a lender to provide you with home financing up to a certain loan amount–basically, the stamp of approval that you have the money, credit history, and other credentials to buy a home up to that price.

“Lenders will conduct a thorough review of your income, assets and credit in order for you to receive a pre-approval.” says Sarah Valentini , president of Radius Financial Group.

How mortgage pre-approval can help you buy a house

Sellers want to accept an offer. The buyer must be pre-approved for a loan before they can accept an offer. If the loan is denied, the buyer may not be able to complete the deal, according to Chantay Bridges with TruLine Realty in Los Angeles.

Some home sellers won’t let buyers tour their home unless they have pre-approved. Many real estate agents won’t take buyers on tours unless they have pre-approved.

How do I get pre-approved for mortgage? Prepare some paperwork In general, the paperwork you’ll need to assemble for your lender includes the following:

  • Pay stubs from the past 30 days showing your year-to-date income
  • Two years of federal tax returns
  • Two years of W2 forms from your employer
  • 60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts such as CDs, IRAs, and other stocks or bonds
  • Any other current real estate holdings
  • Residential history for the past two years, including landlord contact information if you rented

Pre-approval vs. pre-qualification: What’s the difference?

Mortgage pre-qualification should never be confused with preapproval. Valentini says that pre-qualification is solely based on the information you give a lender about your income, savings, and assets. So, it shows how much you could theoretically borrow, but it’s no guarantee–which means these buyers will have to get officially approved for a loan later on and cross their fingers it works out.

Pre-approval, on the other hand, means the lender has already done its due diligence and is willing to loan you the money. A pre-approval letter from your lender confirming this will be a strong indicator to a seller. A pre-approval gives sellers that extra assurance that you are willing and able buy the house. Sellers will be more likely to choose you over someone who has not pre-approved. This is because you are a certain thing and won’t have any worries about the deal falling through.

Bottom Line: Although pre-approval can be a hassle, it’s necessary to get all the paperwork in order to close the deal. You can save time and get ahead of the competition so you can shop for your dream home confidently. Here’s how you can start the mortgage pre-approval process.

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Watch: What Your Mortgage Broker Wishes You Knew

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