The short answer is no. However, if you want your offer to be taken seriously and to stand out from any competing bids, this little piece of paperwork can really give you the edge.
“While you do not ‘need’ a pre-approval letter from your lender in order for your offer to be accepted, I highly recommend all of my buyers present it,” saysDenise Shur, a Realtor® with 1:1 Realty in San Jose, CA. In fact, “I do not look for homes with my buyers until they have a pre-approval letter from their lender. To me, it’s that important.”
What is mortgage pre-approval?
Basically, amortgage pre-approval letteris a guaranteefrom a lender that it’s willing to finance your home purchase up to a certain dollar amount, based on financial info you’ve shared with it, such as your pay stubs and tax returns. Pre-approval should not be confused withpre-qualification.
“These terms are often used interchangeably, but there is a big difference,” explains Scott Ricamore, a Realtor with Keller Williams Park Cities in Dallas. “A pre-qualification is provided based on info shared verbally that has not been verified. Pre-approval requires an underwriter to scrutinize yourdocumentation and approve the income and assets for a loan.”
For that reason, pre-qualification can be done instantly, while it can take up to five days to be pre-approved. So is seeking pre-approval a good ideafor 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, real estate agent with RMN Investments &Realty Services in Laguna Beach, CA.
Real estate agentsprefer showing homes to buyers with a pre-approval letter, because it shows thebuyer 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 ifyou say you don’t have pre-approval.
2 times a mortgage pre-approval letter isn’t necessary
The only buyer who definitely doesn’t require a pre-approval letter is one paying in cold, hard cash. Since this buyer doesn’t need a home loan,sellers know that they can move forward without fear thatlack offinancing might holdthings up,saysJane Peters, broker and owner of Home Jane Realty in Los Angeles.
Another time when pre-approval might not be necessary is if you’re the ideal home buyer—meaning you’vegot a stable job and a solid credit history. This suggests you’ll have no problem getting approved for a loan, so in this case,mortgage pre-qualification may be enough to please the home sellers and their listing agent, at least at the outset.
3 timesa mortgage pre-approval letter is a must
Yet outside this thin sliver of all-cash offers and impeccable buyers lies a huge swath of people who reallyshouldget that mortgage pre-approval letter before they make an offer. See if you fall within any of these bucketsbelow.
- You’re a less-than-ideal home buyer. Ifyour credit worthiness is in any way questionable, getting pre-approval can really help put home sellers atease. So ifyour credit history is spotty (say, a credit scorebelow 640), you’re self-employed, there are gaps in your employment or you have less than two years of employment history, “It’s advisable to take it a step farther and get pre-approved,” says Ricamore.
- You’re in a hot market.With much of the country in a sellers’ market, when it comes to helping you stand out from all the other home buyers, “You need to bring out the big guns,” says Peters. Or in the words of Shur,“When the sellers see an offer witha pre-approval letter, theyinstantly havemore confidence that you are serious, qualified, intend to close, and are on top of your game.”
- You’re not sure how much house you can afford.“Our team has had people completely readjust their budget after getting a pre-approval and finding out that they were nowhere near the price range they had expected,” agrees Christy Murdock Edgar, a Realtor in the northern Virginia/Washington, D.C., market.
If you don’t havea pre-approval letter, your offer shouldinclude a financing contingency, which binds you to this dealonly if you can secure a mortgage. Such contingencies make sellers wary, since closing will hinge on a huge “What if…?” This is why you might want to strengthen your offer by arming yourself with this letter.
How to get mortgage pre-approval
If you’re convinced you must get a mortgagepre-approval letter,make sure you get the best one possible, by shopping around.
“All lenders are not created equal; you’ve got to compare and contrastto find the right one,” Ricamore says. “If you need to close quickly, you need a lender that can get it done fast rather than drag their feet.If you need to win a multiple-offer situation, you need a lender that the listing agent trusts.” So be sure to ask your lenders questions like how longit will take to get pre-approved, and whetherthey’ve worked with particular real estate brokerages in the area where you’re hoping to buy.
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 canbe done in person, online, or over the phone.
- The lender runs a credit check to get your FICO score.
- Italso 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.
“One misconception I hear a lot is that if you apply for a mortgage with multiple companies, they’ll pull your credit, and that will hurt your score,” Ricamore notes. While it’s true that applying for a mortgage will impact your score, “Companies know thatrate shoppinghappens,” he says, and “credit inquiries for a mortgage within 30 days are only calculated as one inquiry for the same type of loan.”
In other words, there are very few downsides—and many benefits—to getting this helpful letter in hand.
