What Does Mortgage Pre-Approval Mean? A Key Advantage in Home Buying

Before you make an offer on a house, getting pre-approved for a mortgage is a smart move. Not only does it give you a clear idea of how much you can afford, but it also helps you stand out in a competitive housing market. In essence, pre-approval increases your chances of a smooth, successful home-buying experience.

Here’s why mortgage pre-approval is important and how it can give you a leg up when shopping for a home.

Understanding Mortgage Pre-Approval

Mortgage pre-approval is a commitment from a lender to finance you up to a certain loan amount. It confirms that you meet the financial requirements—such as income, credit score, and assets—needed to qualify for a loan at that amount.

“Lenders review your income, assets, and credit to issue a pre-approval,” says Sarah Valentini, president and co-founder of Radius Financial Group.

Why Pre-Approval Matters in Home Buying

When a seller accepts an offer, they want assurance that the buyer can actually close the deal. Without pre-approval, the chances of a deal falling through increase, as an unapproved buyer might not secure financing.

As a result, some home sellers won’t even allow buyers to tour their homes unless they have pre-approval. Similarly, many real estate agents won’t show homes to buyers without pre-approval.

What You Need to Get Pre-Approved

To get pre-approved, you’ll need to provide the lender with certain documents, including:

  • Pay stubs from the past 30 days
  • Two years of federal tax returns
  • Two years of W-2 forms from your employer
  • Bank statements for the last 60 days or a quarterly statement of all asset accounts (checking, savings, investment accounts like CDs, IRAs, stocks, and bonds)
  • Details of any current real estate holdings
  • Residential history for the past two years, including contact info for landlords if you rented

Pre-Approval vs. Pre-Qualification: Know the Difference

Pre-qualification and pre-approval are not the same. Pre-qualification is based on the information you verbally provide a lender about your finances. It gives a general idea of how much you could borrow but doesn’t guarantee approval, meaning you’ll need to go through the full approval process later.

Pre-approval, however, means the lender has thoroughly reviewed your financial situation and is ready to lend you money. Plus, you’ll receive an official letter confirming your pre-approval, which can significantly strengthen your position with sellers.

Having pre-approval assures the seller that you’re both financially capable and serious about buying the home, giving you an edge over other potential buyers who may not yet be pre-approved.

The Bottom Line

Although the pre-approval process requires gathering paperwork, it’s something you’ll eventually need to do anyway. Getting it done early can help you gain a competitive advantage and confidently search for your dream home. Ready to begin? Starting the pre-approval process sooner can give you a head start in the home-buying journey.

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