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Buying a Home in 2017? Don't Forget This 1 Important Step

By Matthew Frankel, CFP® – Updated Feb 9, 2017 at 5:22PM

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Here's one smart thing to do before you start shopping for a home.

The homebuying process can be a long one, with many things that need to be done along the way. And while it's not mandatory, obtaining a mortgage pre-approval can make your experience much smoother. Here's what a mortgage pre-approval is, why it's important, and how to tell the difference between a pre-approval and pre-qualification.

What is a mortgage pre-approval?

A mortgage pre-approval is essentially the same thing as applying for a mortgage, just without a specific home in mind. You go to a lender, fill out their application, and probably pay an application fee.

The lender then runs a credit check, requests documentation about your income, assets, and employment history, and verifies all of your information. They will then pre-approve you for a certain maximum loan amount, which is generally good for a specific amount of time (90 days seems to be common). You'll receive a pre-approval letter, which represents a firm commitment to lend you that amount of money for your home purchase.

Young couple holding keys to a home.

Image source: Getty Images.

Why it's so important

There are a few key benefits of a mortgage pre-approval, and I strongly suggest that no prospective homebuyer start the process without one.

For starters, a mortgage pre-approval makes a submitted offer much stronger. You're essentially telling the seller: "Hey -- I'm a serious buyer and actually have the ability to buy this home." (Be aware that the lender can give you a pre-approval letter with a lower dollar amount, so the sellers won't know your maximum budget.)

In addition, you'll know exactly how much house you can afford, so you can plan your home search accordingly. This way, there are no surprises when you fall in love with a particular home and then apply for financing, only to discover you can't afford it.

Also, you may be able to lock in a certain interest rate when you get pre-approved. When interest rates are expected to rise (like they are over the next few years), this could potentially be a big benefit.

Finally, a pre-approval lets you know where your credit stands while there's still time to do a little damage control. It can take years to have a big impact on your credit score, but it's certainly possible to boost your score by a few points in a few months. As you can see in the chart below, an increase of a few points can make a big difference in the amount you'll pay over the term of your mortgage:

FICO Score Range

30-Year Mortgage APR

Total Interest on $200,000 Loan



















Data source:

If you need some tips to boost your credit score, check out this article. It's also worth noting that mortgage lenders typically use the middle of your FICO scores from the three major credit bureaus. So, if you have a 694, 698, and 702, your loan will be based on the 698. Therefore, it may be worth your while to subscribe to a credit monitoring service like that tracks all three scores.

A pre-qualification is not the same thing

Don't be fooled -- a mortgage pre-qualification is not the same thing as a pre-approval. Not even close. A pre-qualification is an informal process where you provide a lender information about your debts, income, and employment situation, and they tell you how much of a mortgage you should qualify for. It is not a firm commitment to lend, and therefore does not carry as much weight with sellers. A pre-approval is the home buying tool you want in your pocket as you begin the shopping process, so be sure you're getting the real thing.

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