Deciding that you're ready to stop renting and finally purchase your first home is exhilarating, and can be a little scary. From mortgages to homeowners associations, first time home buyers have a lot to consider before making that big purchase. In a competitive housing market, it's important that your mortgage application be one of your top concerns. This will impact how you can make your offer as good as possible so that you can buy your dream home.
The best way to do that is by getting pre-approval for a home loan, which tells sellers that you're serious about home shopping. Just why is pre-approval so important? There are a couple of reasons in particular.
What is pre-approval?
In order to understand why you should get pre-approved before going to open houses, you need to know exactly what a pre-approval is. Basically, getting pre-approved for a home loan is a process in which you submit all of the documentation you would submit if you were actually applying for a loan – things like W-2s, bank statements and credit reports, according to Credit.com. An experienced lender then reviews your information and makes a calculated offer on the amount of a loan you would be eligible for.
This is different from a prequalification, which is a suggested loan amount provided by an expert lender solely on the basis of the information and estimates you provide, which are not verified, according to Bankrate. Instead, pre-approval requires you to submit past tax documents and written income information that will provide more accurate information and help the lender make a proper estimate for preapproval possible.
Why do you need to be pre-approved?
The housing market is competitive, and any homebuyer who is serious about their offer on a home will already be pre-approved for the amount of the offer. This shows the realtor showing the house that you're serious about purchasing, and that you're able to follow through on it.
Think about it: without a pre-approval, you could offer any amount for a home. If you were to suggest twice the selling value of the home, and have your offer accepted, would you be able to follow through? Chances are, you wouldn't. Having a pre-approval, though, means you know exactly what you can and can't offer on a home, and shows the seller that you're prepared to pay that amount.
This helps you as well. Once you know the amount of your pre-approval, you'll be better prepared to search specific neighborhoods, housing features, and locations. Without a clear guideline for the amount of money you're prepared to spend on a home, shopping can be overwhelming and frustrating. Having a clear plan in place, though, allows you to be organized and efficient in your home search, looking only at those homes that you're prepared to put an offer on, and staying clear of the homes you'll definitely fall in love with but don't have the budget for.
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