Your realtor may encourage you to get a mortgage pre-approval. But do you really need one?

Mortgage Pre-Approval Timing

According to Bankrate.com, fewer than 10% of mortgage borrowers secured a pre-approval before closing a deal in 2012.

One of the reasons for such a low percentage may be awkward timing. If you get a pre-approval before finding the house you want to buy, the offer may expire or your financial situation may change by the time you apply for a mortgage.  But if you wait until you are ready to make an offer, getting a pre-approval may be an unnecessary step on the path to obtaining a mortgage.

Real Estate Agents Often Promote the Pre-Approval

Many real estate agents encourage pre-approved mortgages in hopes of qualifying prospective buyers and facilitating a quick, uneventful closing of a real-estate deal.

Specifically, they may want the following:

  1. outside confirmation of your financial means and mortgage-borrowing capacity
  2. documentation that could influence the seller to accept your offer
  3. proof of your seriousness in starting the mortgage application process
  4. fast approval for a mortgage (based on pre-approval information) that leads to a fast closing

In certain markets, a seller may find a buyer with a pre-approval is just as attractive as a cash buyer and more attractive than those without proof of mortgage-worthiness, at least in theory. However, sellers don’t always act in predictable ways. They may want to delay a closing for personal reasons or hold out for a substantially higher offer, for example, regardless of your pre-approval status.

A Pre-Approval is Neither a Pre-Qualification nor an Approval

Mortgage Pre-ApprovalWhen deciding whether you need (or want) a pre-approval for a mortgage, consider its definition. Just as mortgage loan guidelines may differ among lenders, what constitutes a pre-approval may vary. Talk to lenders about their processes and the type of loan information and guarantees they’ll provide.

Generally, a pre-approval is a document indicating whether you qualify for a mortgage, the amount of the loan, and possibly the type of loan. It should also include the name and contact information of the loan officer. This determination is made through evaluation of your credit report and score along with your income, assets, and liabilities.

You should provide the following information to get a pre-approved mortgage:

  • W-2 statements (2 years)
  • Federal tax returns (2 years)
  • Statements for all accounts including checking accounts, savings accounts, and other assets that indicate your ability to maintain a home
  • Pay stubs (2 months)

In contrast, an approved mortgage loan is a commitment from the lender indicating the terms and conditions of the loan, such as the interest rate. A pre-qualification simply involves a calculation to determine the amount of loan you can borrow based on your annual income and down payment.

Key Information is Often Missing from the Pre-Approval

Mortgage Pre-ApprovalA key piece of information critical to the mortgage loan application missing from the pre-approval is the appraised value of the home you hope to buy. An underwriting decision considers not only the buyer’s borrowing capacity but also the value of the property held as collateral.

The job of the loan officer who does the mortgage pre-approval is to sell lending services to you. However, the role of the underwriter who approves the mortgage loan is to make sure the mortgage is a good deal for the bank. Because a pre-approval generally has preliminary information only, a firm decision cannot be made until all relevant information is analyzed.

Upfront Work (Similar to a Pre-Approval) is Useful Though Not Required

Whether you pursue a loan pre-approval or not, it’s wise to start the mortgage-qualification, financial information-gathering and lender-evaluation processes before making an offer. You’ll want to figure out how much house you can afford, find a lender you can work with, compile bank statements and tax forms, and address any credit report concerns.

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