Five reasons why getting a pre-approval letter
is a good idea:

Most home buyers know they should get a mortgage pre-approval letter from a lender before they begin seriously shopping for a home. However, the reasons for this advice are not always clear, and buyers sometimes are dismayed by the amount of paperwork involved. Here is some of the reasoning behind the advice.

  1. A pre-approval letter is more reliable than a pre-qualification letter.
    Getting a pre-qualification letter is easy. You just call a mortgage broker or lender, provide some basic financial information, then wait a few minutes for the letter to come through your fax machine, click "submit" and viol'a. A pre-approval letter on the other hand involves verification of the information. Rather than taking your word on faith, the lender will ask for documentation to confirm your employment, the source of your down payment and other aspects of your financial circumstances. Granted, a pre-approval is more time consuming (and possible more stressful) than a pre-qualification. However the additional due diligence is exactly why the pre-approval carries more weight.

  2. You will know how much money you can borrow. Most home buyers have a rough idea of how much they would feel comfortable paying every month on their mortgage. However, there's no quick-and-dirty way to translate that monthly payment into a specific maximum mortgage amount because other factors -- down payment percentage, mortgage insurance, property taxes, adjustable interest rates and so on -- are part of the calculation. In addition, you might not be qualified to borrow as much as you think you should be able to borrow, depending on your income, debts, and credit history. This only leads to unnecessary disappointment and your time wasted. It's best to know exactly what the banks will lend to you first and then base your criteria on that amount.

  3. A buyer will have more leverage in negotiations with the seller. Sellers often prefer to negotiate with pre-approved buyers because the sellers know such buyers are financially qualified to obtain the financing they need to close the transaction. A pre-approval letter is an especially favorable point in a close multiple offer situation. Moreover, you might feel more confident about making an offer with a pre-approval letter in hand and the knowledge that you will be able to obtain a mortgage.

  4. A real estate agent will work harder on the client's behalf. A pre-approval letter signals to the real estate agent that the buyer is well qualified and is serious about purchasing a home. The increased likelihood of a closed sale will naturally motivate an agent to devote more time and energy to a prospective buyer. In fact, some agents will not work with a buyer who does not have a pre-approval letter.

  5. Final points: Pre-approvals are not binding on the lender, are subject to an appraisal of the home you want to purchase and are time sensitive. If your financial situation changes (e.g. you lose your job, lease a car, run up a credit card) interest rates rise or a specified expiration date passes, the lender will review you situation and recalculate your maximum mortgage amount accordingly.
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