You know you need to get your ducks in a row before looking at homes, but does that include securing a pre-approval letter? The truth is, getting pre-approved can actually improve your chances of falling into the sellers’ good graces, so you want to get it done as soon as possible in the home-buying process.
So how organized do your financials need to be before you start looking? Let’s take a look, starting with clarifying what a pre-approval letter actually is.
“It’s a letter from your lender, written on the lender’s letterhead, stating that you are approved for a loan of a specific dollar amount,” says Denise Shur, a Realtor® with 1:1 Realty in San Jose, CA.
To get approved, your lender will collect a stack of paperwork from you that will include pay stubs, federal tax returns, W2s, investment accounts, and residential history. Once your complete financial portfolio is analyzed, the lender will decide whether or not to issue you a pre-approval letter.
You can look without a letter
Real estate agents prefer showing homes to buyers with a pre-approval letter, because it shows the buyer is financially capable of purchasing.
Agents “need to know if you can really buy a home,” Shur says. That said, a pre-approval letter isn’t mandatory to tour a home.
“All agents are allowed to show you homes, even if you do not have a pre-approval letter,” she adds. It just might not be in their best interest, so don’t be surprised if you get some pushback if you say you don’t have pre-approval.
How a pre-approval letter benefits you
If you don’t take the time to get pre-approval, it’s not just the real estate agent’s time you’re wasting—it’s possibly yours as well.
“There is no sense in wasting your own time and that of an agent to see homes until you are ready to purchase,” says Rosanne Nitti, a Realtor with RMN Investments & Realty Services in Laguna Beach, CA.
Getting a pre-approval letter should be one of your first steps in the home-buying process, she says. “Then when you see something you like, you can act on it.”
As a buyer, that ability to act quickly gives you an edge over people who don’t have certification from a mortgage lender.
How to get a pre-approval letter
Serious about getting serious? Here’s how to get started. You can work with either a loan broker, who can connect you with the right lender, or directly with a bank, if you like the loan program they offer.
“Some banks, like Wells Fargo for example, may even give you a ‘priority buyer’ letter, which puts you on a fast track to get your loan closed quickly once you find a home,” says Shur.
Shur describes the process as follows:
Fill out an application. This can be done in person, online, or over the phone.
The lender runs a credit check to get your FICO score.
It also determines your expenses and income by looking at your financial portfolio.
The bank then determines if you qualify for a loan, and if so, what kind and for how much.
Finally, the lender puts this in writing as the pre-approval letter.