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What is a Pre-Approval Letter and Why do you need it?

One of the first questions a real estate agent will ask a home buyer is, "Are you pre-approved?" and it's important that you are before looking at homes. Find out what it means to be pre-approved and why it's so crucial here:

What does it mean to be pre-approved? If you have a written letter from a mortgage lender stating their willingness to loan you a certain amount, then you are pre-approved. A pre-approval letter is different than a pre-qualification letter which is merely an estimate of what you will be able to borrow without the research to back the number.

Why is being pre-approved important? Having a pre-approval letter first of all sets your budget of what you will be able to afford. It may also tell you the length of your loan and the interest rate associated with your payments. When you and your agent choose homes to look at you'll have more bargaining power and appear serious to the seller who will appreciate knowing you have the financial ability to back up your offer. A seller will almost always accept an offer from a pre-approved buyer over a non approved buyer in the case of a bidding war. In short, a pre-approval letter sets your spending cap, labels you as a serious buyer and will help expedite your purchase by giving you an upper hand over non approved buyers.

How do you get pre-approved? First, shop around for a lender that works best for you. Check on interest rates and any special offerings that may work to your advantage. It is always a good idea to work with a local lender as they are accessible, familiar with your area and expedient. Once you've settled on a lender you will be asked to provide your W2's, tax returns and will be subject to a credit check. You will also be asked about your ability to provide a down payment and supply closing costs as well. Once you are pre-approved, keep in mind that your letter may be time sensitive and will be subject to a home appraisal prior to closing.

While a pre-approval letter is a great symbol of financial commitment, it is not a concrete approval which you will receive at the end of your mortgage application.

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