Getting preapproved for a mortgage can be a hassle. You'll have to come up with all sorts of documentation, such as proof of your income, bank statements, and much more. And, you'll have to be ready for a "hard inquiry" on your credit report. For these reasons and others, many homebuyers choose to wait until they've decided on a home to begin the mortgage process.
While you certainly can do this, there are some good reasons to put forth the effort to get preapproved before you begin seriously searching for a home. For example, what if you find errors on your credit report that need to be cleared up, and your offer calls for a 45-day close? It could be a tough errand to get it done in time.
Here are four compelling reasons to start the mortgage approval process before you start the house-hunting process.
It makes your search stay realistic
One of the most frustrating things that could possibly happen in a home search is finding your dream house, then going to the bank only to be told that you can't afford it.
By getting a preapproval, you'll know exactly what the upper end of your budget is, which will help you narrow down your home search before it even starts.
One word of caution: Don't submit your original preapproval letter with your offer, especially if you are offering substantially below what you can "afford." This gives the sellers more ammunition for negotiations. Most lenders will issue you a new preapproval letter for the exact amount of your offer (as long as it's under your preapproved maximum), so the sellers will have no idea of how much wiggle room you have.
Sellers will take your offers more seriously
On that note, submitting a preapproval letter with an offer makes you a much more attractive buyer.
Sure, your offer won't be quite as appealing as an all-cash offer, but you'll be taken a heck of a lot more seriously than a buyer whose offer is still contingent on mortgage approval.
Your preapproval letter tells the seller that you want the house, and can actually afford to pay the amount you offered for it. And it also says there is hardly any chance that you'll run into financing issues before closing.
You can deal with problems before you're in a "time crunch"
If there is a problem with obtaining financing, it's much easier to clear it up before you're locked into a contract.
Let's say your credit score is too low, and that it's due to an error on your credit report. Well, this can take a month or so to clear up, and if you plan to close on your house in 45 days, it can put you in quite the time crunch. On the other hand, if you go for a preapproval, you'll have all the time you need to deal with whatever issues you run into, before proceeding to the offer stage.
Maybe you'll need to order old pay stubs from your employer's payment processor. Maybe you'll need copies of your 2012 tax return that you've since misplaced. Or, maybe you have a borderline credit score for approval, and paying down a few thousand dollars of your credit card balances would push you over the limit. The point is that any of these are easier to deal with when you don't have a deadline.
A smoother and quicker close
Because you have already submitted your income documentation, had your credit checked, and jumped through any other hoops in the mortgage process; you'll be in a position for a much smoother and quicker close than if you wait to start your application process until you find a house.
The loan-closing process can take anywhere from two weeks to over a month from when you have submitted every piece of documentation the bank wants (and trust me, there can be a lot). However, if you've already done that, your lender can immediately start getting your loan ready to go as soon as you have a signed contract, instead of you scrambling for documentation.
How to get started
First, you should shop around for the best interest rates before you settle on a lender. This should go without saying, but many buyers just get one quote and go with it. Once you've done that, go ahead and submit your application for preapproval.
The actual requirements for a preapproval letter can vary by lender. For example, some don't need you to document your income until you are under contract on a home.
However, make sure you're getting a "preapproval" and not a "prequalification." . A prequalification just basically takes the income numbers you state and determines how much house you could afford. A preapproval always includes the very important step of running your credit to determine if you can actually get approved, and sellers know the difference.