Buying a house can be a thrilling process. You start thinking about neighborhoods and choosing the perfect house that will be your home. You’re probably browsing real estate websites and maybe you attend an open house or two. But one critical step that often gets overlooked in the initial excitement is the financial groundwork. Before you start dreaming about backyard barbecues and paint colors, the first conversation you need to have is with a mortgage lender. Here’s why prioritizing this step can set you up for success in your homebuying adventure.
The importance of mortgage pre-approval
The mortgage pre-approval is not just a piece of paper, it’s the foundation of your home search. When you get pre-approved, the mortgage lender does a comprehensive review of your financial health and gives you a clear picture of what you can afford. This crucial first step ensures that you’re looking at homes within your financial reach, preventing disappointment and wasted time.
The pre-approval can also make your offer stronger. In many markets, buying a home is a fiercely competitive process. When sellers are considering multiple offers, a pre-approval can make your bid stand out. It shows sellers that you’re serious, prepared and, most importantly, financially capable of purchasing their home.
Is a pre-qualification good enough?
Pre-qualification isn’t worth the paper it’s printed on.
For a pre-approval, the mortgage lender will do a thorough review of your finances. They’ll verify your income, assets, debts and credit history. They will often require documentation like pay stubs, tax returns, and bank statements. When you’re pre-approved, you get a conditional commitment in writing for an exact loan amount, provided certain conditions are met. It’s an indicator of your ability to secure financing.
But with a pre-qualification, the review process is much less rigorous. It involves a basic look at your financial situation based on the information you provide—but the lender doesn’t usually verify this information. While it can be helpful to give you an idea of what you might afford when beginning your home search, a pre-qualification is not a guarantee of loan approval.
When should you consult a real estate agent?
Your mortgage lender will set the financial groundwork for your real estate transaction. Once you know your numbers, your real estate agent will be your partner in the actual search and negotiation, and this is where their expertise becomes invaluable. Your real estate agent is instrumental in interpreting your financial capabilities into a tangible property search.
This doesn’t mean you shouldn’t connect with a real estate agent right away. It’s OK to start vetting agents and figuring out who you want to work with, even before you meet with a mortgage lender. However, you should wait to start actively searching for homes until you’ve gone through the pre-approval process.
How to choose the right mortgage lender
Picking a mortgage lender is not just about who offers the lowest interest rate. Your lender is your partner through the process, and they should be responsive and willing to educate you on your options. You should also consider the services and value that the lender provides. Not all lenders are created equal, and which lender you pick could be the tipping point on whether your offer is accepted.
When it comes to pre-approvals, some lenders do it better than others. They take it a step further and do “pre-underwriting,” or “loan commitment.” When you get a traditional pre-approval, the loan officer will review all your documentation and financial information. They will give you their best estimation of what you will be approved for. However, they are not the final decision-maker. The final decision-maker is the underwriter, and most lenders will not have an underwriter review your situation until you have an accepted offer. Why? Underwriting takes time and resources, and most lenders don’t want to take the time to do that work until they have a real estate contract.
But some lenders WILL spend that time to do underwriting before you make an offer. And the best practice is to work with that type of lender. This gives you several advantages. One, you know that you will be approved for the loan, as long as your situation doesn’t change. Two, it gives sellers more confidence in your ability to close, since you already have an approved loan before making an offer. Three, it gives you the ability to close faster (as quick as 10 days). A faster close could be appealing to the seller and may make your offer stand out in a bidding war.
The type of lender you choose can also make an impact on the strength of your offer. You might be drawn to some of the discounts or sales that your bank might offer on a home loan. But banks, especially big banks, are notorious for delays in the real estate transactions and slow closings. Firms that specialize in mortgage lending, however, are more responsive, provide better service and experiences, and can provide more options that work for your personal situation. Big banks and credit unions typically try to fit you into the products they offer. A local mortgage lender will be able to offer many more options and will typically be more creative when crafting loans.
If you’ve already connected with a real estate agent, ask them for a recommendation for a mortgage lender that they’ve worked with and trust.
Preparing to meet with a mortgage lender
Meeting with a mortgage lender is much like an interview—you need to be prepared. Have at least two years’ worth of tax returns, your recent pay stubs and bank statements that show your savings and debts. Understand your credit score and what might affect it, because this three-digit number will heavily influence the interest rates available to you. Also, compile a list of your monthly expenses and be ready to discuss them openly. Remember, the lender is assessing your financial stability and ability to repay the loan.
After pre-approval: the next steps
Once you receive your mortgage pre-approval, the fun stuff begins. You can work with your real estate agent and start touring homes. But you still need to maintain the financial stability that earned you the pre-approval. Avoid taking on new debt, making large purchases, or changing jobs, as these can impact your credit profile and could alter your mortgage terms or invalidate your pre-approval.
Also be sure you understand the terms of your pre-approval, including the expiry date. Pre-approvals typically last for 60 to 90 days, after which you’ll need to reapply. Use this period wisely to find your home and secure a purchase agreement.
Sealing the deal
To be successful in your homebuying efforts, you need a thoughtful, well-executed strategy, starting with that first conversation with a mortgage lender. Engaging with a lender early gives you the information and tools you need to navigate the process with confidence. This approach not only strengthens your purchasing power but also sets you up for a more streamlined and enjoyable homebuying experience.