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1 Thing You Need to Do Before You Start House Hunting

Jan 05, 2020 by Matt Frankel, CFP
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If you're in the market for a new home, it may seem unnecessary to start thinking about mortgages until you've found the home you want to buy. However, this is a common mistake.

The time to start the mortgage application process is before you start searching for your next house. Obtaining a mortgage preapproval can make you a more desirable buyer, and also lets you know exactly how much you can afford and what interest rate you'll pay to borrow the money. Here's a rundown of what a mortgage preapproval is and why it's so important that you have a preapproval letter in hand before you start shopping.

What is a mortgage preapproval?

Before we go any further, it's important to define exactly what a mortgage preapproval is. When you visit a mortgage lender's office or website, you might see a quick and easy form to "pre-qualify" for a loan. Typically, this involves filling out your name, income, and employment status, as well as some other information, and then the lender tells you how much you might be able to afford to borrow.

The keyword here is might. While a pre-qualification can be an excellent way to estimate how much you can afford to spend on a house, it doesn't represent a firm commitment to lend you money.

On the other hand, a mortgage preapproval is a thorough process. Not only will you have to fill out a form, but the lender will conduct a "hard" credit check, verify your income and employment history, and confirm your assets. You'll probably need to provide tax returns, pay stubs, and other relevant documentation. In simple terms, a preapproval is the same process as applying for a mortgage, just without a specific property attached to the application.

If the lender is satisfied with the results, you'll get a preapproval letter. This is a commitment to lend you money (up to a certain amount), provided that you find a property that can satisfy the lender's requirements and that your credit and employment situations remain the same until closing.

Why it's important

The short version is that a preapproval letter makes you a more desirable buyer in the eyes of home sellers.

When you're ready to make an offer on a home, you can submit a copy of your preapproval letter along with your offer. By showing the seller that you've already been through the mortgage approval process and have a commitment from a lender, you will be taken far more seriously than a buyer who doesn't have one.

This can be an especially valuable tool if you're involved in a bidding war, or if your real estate market is particularly hot right now. Think of it this way -- if you list your home for $200,000 and receive two full-priced offers, one with a full preapproval and one without any indications that they'll be able to get a mortgage, which are you more likely to accept?

Sellers place tremendous value on offers that are highly likely to close. The last thing a seller wants is for a deal to fall through and to have to list the property all over again. In fact, it's not uncommon for sellers to accept a lower offer in a bidding war if it appears virtually certain that the buyer will be able to close.

To be clear, a preapproval is unlikely to be quite as impressive to a seller as an all-cash offer. But it will give you a big advantage over fellow mortgage-needing buyers who haven't done their homework.

Don't just get one preapproval

It's also important to mention that a mortgage preapproval doesn't just get you a commitment from a lender. Because the lender has seen your credit and other qualifications, they can also tell you what interest rate you'll get.

For this reason, it can be a smart idea to get preapprovals from a few different lenders. Seemingly small differences in interest rates can result in thousands of dollars of long-term savings. And while you can certainly wait until you're under contract on a home to start shopping around, there's a special provision in the FICO credit scoring rules that counts any mortgage applications that take place during a two-week period as a single credit inquiry -- so it's to your advantage to do it alongside your preapproval.

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