Key insights:
- A pre-approval letter is provided by a lender after a thorough analysis of a potential buyer's credit and financial history
- A pre-approval letter explicitly tells real estate agents and home sellers how much a buyer can borrow in a home mortgage loan
- Pre-approvals can help buyers in negotiations, because they show that the buyer is prepared and qualified
You can gain a distinct advantage over other homebuyers by arranging for financing even before you put an offer on a home.
What is a pre-approval?
You may have heard of getting pre-qualified or pre-approved when searching for homes. In a pre-qualification, a lender receives – but does not verify – financial and credit information provided by the potential borrower. After quickly analyzing what the buyer has provided, the lender offers an estimate of the loan total for which they could qualify.
A pre-approval is a more official and involved process where the lender verifies credit information and financial documents provided by the potential buyer. These documents include, but are not limited to:
- Income verification (pay stubs)
- Employment W2s
- Previous year's tax returns
- Bank statements
- A full credit report
After reviewing and verifying this information, the lender will issue a pre-approval letter. This pre-approval letter explicitly tells you, real estate agents and home sellers how much you can borrow and that you have acceptable credit to be approved for a home mortgage loan.
Is a pre-approval a guarantee?
Your pre-approval letter is based on the information you have provided the lender at a certain point in time. If you were to lose a significant amount of money or damage your credit shortly after your pre-approval was issued, you may no longer be approved for that amount when it comes time to buy. For this reason, a pre-approval letter cannot be considered a guarantee that you will be approved for a loan.
How can a pre-approval boost my negotiating power?
The goal of everyone involved in a real estate transaction – from the buyers and sellers to the real estate agents representing them – is to close the deal effectively and with minimal mishaps.
A pre-approval shows that you are not only prepared to apply for a loan, you are also considered to be a responsible loan applicant by your preferred lender. This will give you an edge over other buyers in multiple offers or negotiating situations, because the seller will know that you are less of a risk.
A recent study shows that only 10 percent of buyers get pre-approvals when searching for a home, so you're likely to stand out from the competition if you have a pre-approval letter.
Ready to get pre-approved?
There's no better way to prepare yourself for buying a home than to speak with a lender about getting pre-qualified or pre-approved. The experts at Edina Realty Mortgage are here to provide no-strings-attached, honest insights about your buying and powering power.
Reach out today to get in touch with a lending expert.
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