Make your home buying process easier with a pre-approval letter.
Buyer, buying, First-Time Home Buyer, Home Owner

Do I Need a Mortgage Pre-Approval Before Making an Offer on a House?

Househunting in any market requires you to know what you can afford before making an offer on a house. A pre-approval letter from your bank or lender will make your home search and purchase much more straightforward.

In a seller’s market, properties move quickly. You’ll have a better chance of submitting a winning offer on your dream home if you’re ready to make an offer right away. 

If you’re thinking about buying or selling a home in the Portland Metro area, Julia Monaghan Real Estate is here to help. Our expert team takes the stress out of the homebuying process. Contact us today to get started. 

What Is a Mortgage Pre-Approval?

If you aren’t prepared to pay cash for your new home, you’ll need to finance it with a mortgage. 

Your lender will use a lot of financial information from you to determine the size of mortgage they are willing to offer. They will want to know about your income, debts, and cash you have available for your purchase. 

Having a pre-approval letter before making an offer on a house is essential.

Remember that the lender is taking a risk by loaning you such a sizable amount of money. So they have specific formulas they use to determine how much they think you can borrow and repay without defaulting.

Your lender may give you a pre-qualification after briefly discussing your financial resources. A pre-qualification is a rough estimate of how much money you are likely to qualify for when you apply. You will likely do some paperwork, but the pre-qualification doesn’t usually require much documentation. The lender might also obtain your credit report at this stage.

However, to be pre-approved, you will need to provide your lender with significant documentation of your income, assets, and liabilities. For this process, the financial institution will:

  • Ask for pay stubs or other wage verification for at least the last two months.
  • Obtain and review your credit report and score. You will also have a chance to review this documentation.
  • Confirm your current employment.
  • Ask for your most recent tax return. If you are self-employed, the lender will probably ask for at least two years of returns.
  • Ask for your bank statements.

In short, your pre-approval stops just short of actually completing the loan. It tells you, your realtor, and the seller that you are all but guaranteed to have this financing available. 

A pre-approval letter shows the seller that you can finance the loan.

Getting a Pre-Approval Letter vs. Pre-Qualification Letter

If you’re just starting to consider purchasing a new home, you may find a pre-qualification to be useful. You won’t need to put much legwork into gathering the required information for this first step. 

The pre-qualification letter will give you a good idea of how much home you can afford. You’ll also learn what the monthly payment would be at a certain purchase price. It doesn’t, however, help you much when making an offer on a house.

Most sellers will not give much weight to your pre-qualification letter because it does not indicate the lender is prepared to fund this amount. So if you are seriously ready to shop for a home, you need to have a pre-approval letter before making an offer on a house. In a seller’s market, it’s a necessity. 

Why Should I Get Pre-Approved Before Making An Offer On A House?

Getting pre-approved for a mortgage is like checking the balance in your bank account and making sure you have your debit card before going to the mall. You know what you can spend and how you’ll access the money.

Making an offer on a house is much more successful when you've been pre-approved.

Trying to buy a house without a pre-approval letter is discouraging and a waste of your time. You may fall in love with a home you can’t afford. Or a seller might pass right over your offer. In almost every market, sellers choose offers that come from a pre-approved buyer. 

Save yourself the frustration of missing out on the perfect house. Instead, when you find your new home, you’ll know that you have the spending power to make an offer on it. 

Your pre-approval letter lets the seller know that you have the purchasing power to honor your offer. That reassurance can make you more appealing than a buyer whose financing is in question. 

Having your pre-approval in place before finding the home you want also gives you maximum flexibility to close quickly. A fast closing is often a big draw for sellers. As always, make sure you are working with an expert real estate agent who will protect your time and money with a strategic offer.

How Long Does the Pre-Approval Last?

You usually have 60-90 days for pre-approval coverage.

Lenders vary on how long they allow a pre-approval to sit before it expires. Your lender or mortgage broker should clearly state the time frame of your pre-approval before you agree to it. 

Most pre-approvals expire after 60 to 90 days. If you haven’t entered into contract on a home by then, ask your lender to renew your pre-approval. They may require updated information from you, such as new pay stubs and a new credit report. But the bulk of the mortgage application paperwork will transfer without additional input from you. 

Should I Get More Than One Pre-Approval Before Making an Offer on a House?

Half of the homebuyers using a mortgage only talk to one lender. Collectively, new mortgage holders in 2019 would have saved over 700 million dollars if they had compared the available rates. And that’s only for one year. Those savings – or lack of savings – compound every year after a mortgage starts.

By law, lenders must disclose both their mortgage rates and the annual percentage rate, or APR. While they sound similar, they tell you two different things. 

Be sure to have the lender clarify your interest rate and APR.

The mortgage rate is the amount of interest you will pay on the money you borrow for your home. The APR takes that rate and then calculates it with the other fees and costs associated with the mortgage. 

Picture two banks, each offering a thirty-year mortgage at 5%. If one has an APR of 5.3% and the other’s is 5.5%, the second lender has higher fees. The APR is there to help borrowers compare lenders quickly and easily.

It is more work to get several pre-approvals, but not significantly more. Different lenders will want to know the same core information: 

  • Income 
  • Employment Status
  • Assets
  • Debts
  • Credit Scores 

You will already have the documents on hand if you choose to apply with a second lender.

If you’re worried about damaging your credit by getting more than one pre-approval, don’t stress. Each lender will have a separate credit inquiry. But multiple queries in a short time frame for loan shopping generally don’t hurt your credit score. 

What If My Information Changes Before Closing?

Don't make any job changes or big purchases that require credit once you have your pre-approval in place.

Avoid making any significant purchases or changes in between receiving your pre-approval and closing on the house. Situations such as the following may disrupt your ability to secure a mortgage after the pre-approval:

  • Job Change
  • New Loan or Line of Credit
  • Lawsuit
  • Missed Credit Card Payments

If any unforeseen changes happen, reach out to your lender right away to see what options you have.

Is It Time to Shop for Your New Home?

I absolutely love representing buyers in the exciting home purchase process. If you’re ready to buy or have questions about how it all works, let’s connect. 

The team at Julia Monaghan Real Estate is here to help you. From mortgage referrals to receiving the keys to your new house, we’re here to make your home purchase stress-free. Reach out today to start the journey to your new home. 

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