If you're dreaming of owning your own home, one of the first questions on your mind is likely, "How much can I afford?" The last thing you want is to fall in love with a house only to find out it's out of your budget.
While online affordability calculators can provide an estimate, they may not always be accurate. So, what's the best way to know your true budget? Enter: the pre-approval letter from a trusted, local mortgage lender.
Why Pre-Approval Matters
Getting a pre-approval letter is a crucial step in your homebuying journey. The pre-approval provides you with an accurate estimate of how much you can borrow for your future home, based on your financial situation. Unlike online calculators, which might give you a generic figure on how much you can borrow, a pre-approval letter considers your unique circumstances, income, and assets.
The Pre-Approval Process
Luckily, getting pre-approved isn’t a complicated process. But you do need to have your financial information prepared for it. You should gather the following information so you can submit it to a local, trusted mortgage lender:
- Proof of income and assets (bank statements, W2 statements)
- Employment verification (pay stubs)
- ID (driver’s license, social security number)
A lender will be able to give you an exact list of documents you need to show.
Your pre-approval can be ready as quickly as one hour depending on the speed of your lender, and then you’ll know exactly how much you can ‘shop’ with! A soft credit pull is conducted, which won't affect your credit score, so you could always shop around with a few different lenders to see who offers what.
Benefits Of Having Pre-Approval
Having a pre-approval letter in hand has several advantages:
- Clarity in househunting: With your pre-approval, you know exactly how much you can afford. It saves you from wasting time and heartache on homes outside your budget. On the other end of the spectrum, you might be surprised by how much home you can actually afford. You might be able to afford to live in the town you thought you’d be priced out of.
- Sellers want it: A pre-approval letter shows agents and sellers that you're a serious and qualified buyer. This competitive advantage can make a significant difference in a sellers market. An offer that comes with pre-approval is typically more attractive than a similar offer that doesn’t include pre-approval.
- Customizable: Your pre-approval letter can be customized to match the listed price of the house you're interested in. This can help you avoid negotiations and streamline the buying process.
Using Your Pre-Approval Letter
Once you receive your pre-approval letter, you'll have a clear understanding of your purchasing power. When you work with a quality real estate agent, they’ll upload your pre-approval letter into an attractive presentation to lay your offer out for the seller and their agent.
Keep in mind that a pre-approval is typically valid for 90 days, but if you require more time, you can easily get pre-approved again.
Planning For Your Dream Home
If your pre-approval estimate falls short of your desired price range, you have a couple of different options. You can:
- Reduce your expectations: This might mean compromising on losing an extra bedroom or bathroom, buying a home that needs some TLC, or widening your location search. Work with a quality real estate agent to strategize what your options are. If you’re a first time buyer, remember: this isn’t your forever home. It’s better to purchase a property and start accruing equity than continuing renting and waiting for that “perfect home”.
- Make a plan for the future: Speak to a quality mortgage lender to explore steps you can take to qualify for your dream home in the future. Whether it's improving your credit score, paying off the right debt to reduce your DTI, or saving for a larger down payment, these experts will guide you toward homeownership success. You might be surprised that accessing a larger mortgage isn’t as hard as you thought it might be.
Getting pre-approved puts you in control of your budget and means you won’t be wasting your time. With your pre-approval letter in hand, you can confidently navigate the real estate market, knowing you're financially prepared to make an offer on your dream home — let's do this!
