What is Pre-approval and Why is it so Important Right Now
Today’s home buying market is competitive and constantly changing. Every advantage you can gain as a buyer is critical. Being intentional and prepared are musts when buying a home right now. A pre-approval letter from a lender puts the buyer in a better position to purchase a home. This article takes a closer look at this vital home buying preparation tool. It explores what a pre-approval letter is and why it is so important in a competitive housing market.
What is a pre-approval letter? How is it different from pre-qualification?
Pre-approval from a lender is the only way to know your true price range for your home purchase and how much money you are qualified to borrow for your loan. Realtors and Sellers will take buyers seriously with a letter. Plus, the mortgage process will be smoother and faster.
A mortgage pre-approval letter from a lender is a letter that assures you, sellers, and real estate agents that you have the ability to purchase a home under the guidelines outlined in this letter from the lender. This letter is different from pre-qualification.
Getting pre-qualified is okay, but not ideal. Pre-qualification for a mortgage is a quick and easy process. Lenders ask some basic information about your annual income, credit score, employment, and financial status over the phone, email, or internet. Based on what you share, you can know right away whether you qualify for a mortgage loan. The answers to these questions may also help the lender determine what mortgage programs you may be eligible for. The strength of pre-qualification is that it is an easy process, however, it is only as good as the information given to your lender. So pre-qualification is a non-verified guess of how much you can afford. But guesses will do you very little good in a competitive housing market.
A pre-qualification letter can’t compete with a pre-approval letter. In order to secure a mortgage pre-approval you must complete a mortgage application and submit all required documents. Some common documents that are required are:
- 2 years of pay stubs and W-2’s
- 2 – 12 months of banking and investment account statements
- 2 years of Tax Returns
- Financial statements if self-employed
- Divorce decrees
- Credit reports with letters of explanation for credit blemishes
Pre-approval for a mortgage involves a deep dive into your finances to verify your income, assets, and credit. If you are considering buying a house in the next six months, you should begin the pre-approval process now.
Why is this pre-approval letter so important in today’s housing market?
In this competitive market, Sellers won’t accept an offer without a pre-approval letter. Every step you can take to gain an advantage as a buyer is important. There are so many more buyers looking for homes today than there are homes available for sale. This is creating some serious competition. According to the National Association of Realtors (NAR), the average home is getting 4.8 offers per sale. This is causing bidding wars and a pre-approval letter will give a buyer an advantage. It lets the Seller know that you are qualified to buy their home.
A pre-approval letter also helps a prospective buyer figure out his or her limit on affordability. It educates the buyers about their finances and credit history. If one has had financial troubles in the past, it may be reflected in the credit history. It is best to face this problem early on in the home-buying process. This process also allows buyers to figure out a monthly mortgage payment that is appropriate for their budget. In general, 43 – 45 percent is the maximum debt to income ratio that qualifies for approval.
It is important to allow ample time for the pre-approval process. It can take a long time to be approved right now since lenders are extremely busy from the increased demand in the housing market. However, pre-approval letters are only valid for 90 days, so it is important to time the process carefully.
With a pre-approval letter in hand, you will have your finances in line, so when you are ready to make an offer on the home of your dreams, you will be ready. With mortgage rates rising, home prices going up, and bidding wars taking place, home buyers need guidance to navigate this competitive housing market. It is important to have a team of professionals on your side to make sure you are prepared for the challenges ahead.
When you are ready to purchase a home in Maryland, contact Boyle & Kahoe. We’ll walk you through every step and answer any questions you may have. Boyle and Kahoe Real Estate was founded in April 2019 by Jessica Boyle Tsottles and Robert Kahoe. The brokerage foundation is based on a strong passion for real estate and helping connect clients to the right properties.
Jessica Boyle Tsottles is an experienced Realtor in Harford County, and Robert Kahoe is an experienced attorney focusing on real estate, estates and trusts. Together, the two are blending their vast knowledge bases together in a brokerage that is able to handle any real estate transaction.
When agents and attorneys work together, they make an amazing real estate team. Real Estate agents and lawyers are constantly discussing the transaction and getting information from each other needed for the transaction. They are continually discussing and proposing solutions as both parties want to ensure that the file closes on time and all issues are resolved. Both agents and lawyers play an important role in the home buying process. Check out their website at https://www.boyleandkahoe.com/ for more information.