Planning to Buy a Home This Year? Here’s Why Pre-Approval Should Be Your First Step
If purchasing a home is on your agenda this year, there’s one crucial step in the homebuying journey that you might not fully understand: pre-approval. It’s a game-changer that could make your path to homeownership much smoother. Let’s break down what it is, why it matters, and how it can give you a competitive edge.
What Is Pre-Approval?
Think of pre-approval as getting a green light from a lender. It’s a lender’s way of telling you how much they’re willing to let you borrow for a home. To determine this amount, they’ll dive into your financial history. According to Realtor.com, here are some of the key documents a lender might request during the process:
- W-2s from the last two years
- Tax returns from the last two years
- Pay stubs from the last 30 days
- Bank statements from the last 60 days
- Investment account statements (if applicable)
- A two-year history of where you’ve lived
Once the lender reviews your information, you’ll receive a pre-approval letter stating how much you can borrow. But remember, this isn’t set in stone—changes in your financial situation, like switching jobs, applying for new credit, or withdrawing large sums from savings, can impact your pre-approval status.
Why Pre-Approval Is Essential
1. Understand Your Budget and Borrowing Power
With home prices projected to rise in many areas and mortgage rates still fluctuating, affordability is top of mind for many buyers. Pre-approval gives you a clear picture of your maximum borrowing power and helps you understand how today’s rates will affect your future monthly payments.
Armed with this knowledge, you can confidently tailor your home search to fit your financial comfort zone. This way, you avoid falling in love with a home outside your budget and ensure your mortgage aligns with what you’re comfortable paying each month.
2. Strengthen Your Offer and Stand Out to Sellers
When you’re ready to make an offer, pre-approval gives you a competitive edge. It signals to sellers that you’re a serious buyer who’s already gone through a financial review.
Sellers are more likely to prioritize offers from pre-approved buyers because it increases the likelihood that the transaction will proceed smoothly. Greg McBride, Chief Financial Analyst at Bankrate, explains:
“Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns, and bank statements. A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”
Bottom Line
If buying a home is on your to-do list this year, securing pre-approval for a mortgage should be your top priority. It helps you understand your financial capacity, narrows your home search, and positions you as a strong contender in today’s competitive market. Connect with a trusted lender to get started and set yourself up for success in your homebuying journey.
