Homebuyers

A Competitive Edge: Why You Need a Pre-Approval Letter in a Hot Housing Market

Temperatures aren’t the only thing about to get hotter this spring. The housing market is also expected to warm up.

If you’re hoping to buy a home in the coming months, you’ll want to use every tool at your disposal to make your offer stand out in this hot market. A mortgage pre-approval letter can provide buyers with a competitive edge. They send a message to sellers that you are likely to be able to get financing through a lender to purchase the home.

“Pre-approval letters for mortgage loans are a definite advantage,” said Realtor Alexei Morgado, who is also the founder and CEO of Lexawise, a real estate exam preparation company.

“It’s an indication to the sellers of the financial ability of the applicant,” said Morgado. “In many cases, the pre-approval letter is the final nail in the coffin, as sellers realize they’re dealing with a less risky party.”

Below, we’ll cover what mortgage pre-approval letters are, how to get one, and why they make such a difference in fast-moving housing markets.

What homebuyers need to know about mortgage pre-approval letters

A mortgage pre-approval letter is a written commitment from a mortgage lender that specifies how much they will generally lend to a borrower. This helps buyers figure out how much home they can afford and make offers with confidence.

The letters are typically only good for a set amount of time, usually 60 to 90 days. To get one, a lender will review your credit report, income, and assets to determine your eligibility and how large of a loan you could potentially qualify for as a borrower.

When you make an offer on a home, you can include this mortgage pre-approval letter to demonstrate to the seller that you have access to the funds needed to buy the home. This can make your offer stand out over others because the seller feels confident your financing won’t fall through at the last minute.

Note: There’s a key distinction between a pre-qualification letter and a pre-approval letter. A pre-qualification is usually based on self-reported information, such as your income, assets, and credit score. The lender generally doesn’t verify this information when issuing a pre-qualification letter.

A mortgage pre-approval, on the other hand, is when the lender has already verified your information and cleared you for a loan.

This makes a pre-approval letter more valuable to sellers. It is a stronger indication that you’ll get the funding needed for the sale to go through.

How homebuyers can get a mortgage pre-approval letter

To get a mortgage pre-approval, you’ll need to apply following the specific lender’s guidelines. Some lenders can offer a soft credit check, which typically doesn’t impact your score. Others require a hard credit check, which could result in your score temporarily falling a little.

You will also need to provide some documentation to provide a fuller financial picture, such as:

• Bank and investment account statements
• Tax returns and forms
• Recent pay stubs

You’ll also need to verify your identity and provide your Social Security number.

Assuming everything looks good, the lender will pre-approve you up to a certain dollar amount. You will also be provided with a letter that you can include with any offers you make on a home.

Benefits of getting a pre-approval letter when buying a home

Mortgage pre-approval letters offer several advantages to buyers, especially in a competitive housing market.

Mortgage pre-approvals offer more assurance for home sellers

The big reason to get a mortgage pre-approval letter is that it increases the seller’s confidence in your offer. If the seller is fielding multiple offers and yours is the only one with a pre-approval letter, they’re more likely to move forward with your offer.

A pre-approval tells the seller that you’re likely to be able to pay what you’ve pledged.

“It tells the seller that the buyer has already been financially checked out and can likely get the loan needed to buy the house,” said Morgado. “[This] makes the offer feel safer and more serious than one without a letter.”

Morgado recently had clients who beat out a higher offer on a home because they were pre-approved for a mortgage.

“After closing, the listing agent of the house told us that they were close to accepting a higher offer,” he said. “But [the sellers] ultimately chose my buyers because the pre-approval made them feel the deal was safer and more likely to close on time.”

Mortgage pre-approvals may speed up the homebuying process

Mortgage pre-approvals can also speed up the homebuying process, leading to a faster closing. This can be appealing to both homebuyers and sellers.

“The heavy lifting, such as the credit report, income and asset verification, and initial underwritten review, has already been done,” Morgado explained. “So, the lender can quickly proceed from the accepted offer stage to approval and subsequently to a clear to close.”

Mortgage pre-approvals can help buyers set a realistic budget

A mortgage pre-approval can also help first-time homebuyers get a better sense of how much home they can afford.

The pre-approval letter will indicate the maximum amount the lender is willing to offer. This can help you narrow down your search to homes at that price (or cheaper).

Remember: Just because a lender approves you for a certain amount doesn’t mean you have to spend that much. Review your own income and expenses and determine how much you’re comfortable spending on a home.