Why Pre-Approval Should Be at the Top of Your Homebuying To-Do List

Since the supply of homes for sale is growing and mortgage rates are coming down, you may be thinking its finally your moment to jump into the market. To make sure youre ready, you need to get pre-approved for a mortgage.

Thats when a lender looks at your finances, including things like your W-2, tax returns, credit score, and bank statements, to figure out what theyre willing to loan you. After that process, youll get a pre-approval letter to show what you can borrow. Here are two reasons why this is essential in todays market.

Pre-Approval Helps You Know Your Numbers

Whilehome affordabilityis finally starting to show signs of improving, its still tight. So, its a good idea to talk to a lender about your loan options and how todays changing mortgage rates will impact your monthly payment. The pre-approval process is the perfect time for that. In addition to determining the maximum amount you can borrow, pre-approval also helps you understand this piece of the puzzle. As Investopedia says:

Consulting with a lender and obtaining a pre-approval letter allows you to discuss loan options and budgeting with the lender; this step can clarify your total house-hunting budget and the monthly mortgage payment you can afford.

You should use this information to tailor yourhome searchto what youre actually comfortable with budget-wise. Since mortgage rates have inched down some lately, you may find youre able to afford a bit more than youd expect for your monthly payment, but you still want to avoid overextending. As CNET explains:

In many cases, a lender may preapprove you for more than you need to spend on a home. And while it can be tempting to look at houses outside your budget, it wont help you in the long run. Before you start touring homes, figure out how much you can realistically afford and stick to your budget.

Pre-Approval Makes Your Offer More Appealing

And once you do find a home you want in your budget, pre-approval has another big perk. It not only makes your offer stronger, it also shows sellers youve already undergone a credit and financial check. When a seller sees you as a serious buyer, they may be more attracted to your offer because it seems more likely to go through. As Greg McBride, Chief Financial Analyst atBankrate,says:

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 youve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.

As mortgage rates trend down, more buyers are going to be ready to jump back into the market. And while demand is still limited right now, theres the potential for competition to pick back up, especially in hot markets. So, why not stack the deck in your favor and make sure youre putting yourself in the best position possible when you find a home you love?

Bottom Line

If youre planning on buying a home, dont forget to get pre-approved early in the process. It can help you get a more in-depth understanding of what you can borrow and shows sellers you mean business.