As a soon-to-be homeowner, you know that you’ll have to sort out your future mortgage at some point before collecting the keys for your future home. What you may not know is exactly when in the homebuying process you should tackle the mortgage question.
Too many homebuyers wait to worry about home financing until they’re knee-deep in negotiations on their dream home, only to discover a credit or financing issue that dashes their home-owning hopes and dreams.
Before you too get caught up in heading to open houses and picking out paint colors, remember: savvy homebuyers get pre-approved for a mortgage before they begin looking for a home.
Why Should I Get Pre-Approved Before I’ve Started Looking at Homes?
Idly scrolling your local real estate listings on your lunch break and daydreaming about a far-off future where your as-yet-to-be-conceived children play in lush backyards and your fabulous friends come over to your house for Instagram-envy-inducing cocktail parties is one thing.
But if you’re actually serious about buying a home in the next few months, getting pre-approved before you start house-hunting allows you to look at homes knowing that you’ll be able to secure financing for them, should you decide that any one of those homes you see is the right home for you and your family.
A pre-approval letter will let you know, confidently, that you’re qualified for a mortgage. (If for some reason you discover an issue with your credit or have trouble getting pre-approved, finding out earlier in the homebuying process is a lot better than finding out later. )
Plus, a pre-approval letter will give you an exact figure for just how much a lender would be willing to loan you. Which means you can skip right past any homes that are out of your price range, instead of potentially enduring the heartbreak of falling in love with a place you discover you can’t quite afford.
(Interested in more reasons why homebuyers should get pre-approved for a mortgage? Check out these previous entries in our on-going mortgage pre-approval series.)
You Know Who Loves Pre-Approved Homebuyers? Real Estate Agents.
Real estate agents love homebuyers who do their homework and make real estate professionals’ lives easier.
With a pre-approval letter, you’ll be able to show your real estate agent that yes, you will be able to obtain a mortgage when it’s time to do so. That means your real estate agent won’t be stuck in a situation where she’s done lots of work, shown you lots of homes, and helped you craft an offer, only to discover at the last minute that you can’t actually buy the place you want. (It happens more often than you might think.)
As an extra bonus, a pre-approval letter to show your real estate agent sets a firm upper limit on what homes she shows you. She won’t waste her time or yours showing you places out of your price range. If you’ve got a lower target home price than your pre-approval letter shows, by all means, you should use your target numbers to set terms with your real estate professional. There’s no reason to buy the biggest home your lenders say you can afford, and a real estate professional will understand and want to work with buyers shopping for a home with a budget in mind.
But there’s a difference between we want something around $225,000 but are approved to borrow up to $300,000, and we have $45,000 to put down and our lender will loan us up to a maximum of $180,000, so our budget is a maximum of $225,000. Knowing which camp you’re in can help your real estate agent find you the best possible home, and steer you clear of places just out of your reach.
Is It Ever Too Early to Get Pre-Approved for a Mortgage?
Most pre-approval letters have an expiration date, usually 60 or 90 days after you are first pre-approved.
If it takes you longer than a month or two to find a home, it’s usually not too much trouble to obtain an updated pre-approval—assuming, of course, that your financial situation is as it was when you applied for pre-approval the first time. You would most likely need to resubmit updated versions of the financial documents you submitted previously, and you’d be asked to certify again, for example, that you’re still employed. As a borrower, the only real concern with resubmitting a pre-approval request is that your broker or lender will need to recheck your credit.
As a financially savvy homebuyer, you probably already know that actively seeking credit affects your credit score. Too many recent credit applications can have a negative impact on your credit score. And of course, if there’s ever a time to stress about your credit score, it’s when you’re looking to buy a home: a lower credit score can mean higher interest rates or fewer financing options for your mortgage.
That said, if you need more time in your home search, updating your pre-approval application won’t tank your credit score. Submitting a second mortgage pre-approval application is not the same as suddenly applying for a dozen new credit cards, and the credit reporting bureaus understand that. Most credit scoring models try to treat multiple credit inquiries that indicate a borrower is behaving responsibly—say, comparing rate on home loans between multiple lenders—as a single inquiry.
So if your initial pre-approval application and a follow-up application fall in the time-frame specified by the credit reporting bureau’s scoring model, the second pre-approval application might not affect your score at all. And even if updating your pre-approval does impact your score, it shouldn’t be by much: for most people, a single additional credit inquiry shouldn’t lower your score by more than 5 points.
Is it Ever Too Late to Get Pre-Approved?
Ah, procrastination… If you’ve read this far, you know that as a homebuyer, you should get a pre-approval before you actually need financing to pay for a home. You’ll save yourself significant time and trouble, give yourself enough time to catch and fix any issues with your credit, and having a pre-approval letter in hand will make your real estate agent happy.
But what if you’ve found the home of your dreams and you’ve just now realized you need to work out the mortgage issue? It’s not too late. Pour yourself a fresh cup of coffee, clear the next couple dozen minutes on your calendar, and get started on your mortgage pre-approval with Morty here. You could have a pre-approval letter in hand before you finish your cup of joe.