How a Pre-Approval Letter Can Help You

You've decided you're ready to make the plunge and purchase a house. Whether you're a first-time home-buyer, moving up or buying a vacation home, before you start shopping, you should contact a lender to get a pre-approval letter.

Here's why this is such an important first step:

1. You'll know how much money you are qualified to borrow.
   A pre-approval letter indicates you are pre-approved by a lender for a specific mortgage amount. The lender performs an analysis of your credit, income and assets to support the claim. To get a more accurate picture of what you're capable of affording, lenders will also take into consideration your debt-to-income ratio—the percentage of gross income that goes toward paying debt. Typically, this includes mortgage principal, interest and insurance, property taxes, homeowner's insurance and association dues, credit card debt, other loan payments and child support. You may be able to afford more or less than you originally planned, but either way the pre-approval will quickly help you identify the price range you should be looking into to narrow down your search.
2. A pre-approval letter shows you are a qualified and serious buyer.
   Sellers often prefer to work with pre-approved buyers because they know they are financially qualified to close the transaction. A pre-approval letter is not the same as a pre-qualification letter. A pre-qualification letter doesn't hold as much weight because they are easy to obtain by simply providing some basic financial information without verification.
3. You'll have more bargaining power.
   A pre-approval letter is especially advantageous in a multiple-offer situation. The sellers will know that you are able to obtain the mortgage for the purchase because you have done your due diligence to prove yourself a qualified buyer. And by doing this ahead of time, you may be able to speed up the loan process and close quicker.
4. You may need a pre-approval letter to submit an offer.
   With foreclosures on the rise, many homes are bank REOs (Real Estate Owned). Bank-owned homes are often sold at a discount and receive multiple offers. Banks often require a pre-approval letter to submit an offer. Without one, your offer may not even be considered. Additionally, some real estate agents won't show you homes without a pre-approval.
5. You can avoid heartbreak.
   The last thing you want is to fall in love with a house and then be told you can't afford it. The pre-approval will get you started on the right track, searching for homes within your price range.
6. Your real estate agent will make you a priority.
   Knowing you are fully capable of purchasing a home, your real estate agent will be encouraged to work harder, devoting more time and energy to you.
7. Pre-approval letters are not valid indefinitely.
   Financial situations can change, such as losing a job, leasing or buying a car, running up credit card bills, interest rates rising, etc. You'll need to update your pre-approval if your circumstances change. Most lenders will provide you with an expiration date, but, generally, it's wise to get a new pre-approval every three months to stay current.

Tip: To get the most out of your pre-approval, run your credit report and clear up any errors or delinquencies before getting your pre-approval. A lower credit score could mean a higher interest rate.