The Importance of a Mortgage Pre-approval Letter (2024)

Getting a pre-approval letter is easier than you might think. Once you have selected your lender and received the thumbs-up from them to go and look for a home, you can ask them for an official letter to confirm their statement.

It is a very common practice in the real estate and banking industry to obtain a mortgage pre-approval letter. When you’re working with a reputable mortgage team, providing this letter should be standard practice for them.

While you may be able to verbally express that you’re ready to buy, there are many great reasons forbeing pre-approved for a mortgage. A pre-approval letter is physical evidence of the fact that you are a serious buyer with the capacity to purchase.

Sellers really don’t know anything about the potential buyers coming through their door. And for valid reasons they are always skeptical whether the buyer is going to succeed in qualifying for the mortgage. You will find that sellers take you more seriously when you’re equipped with a mortgage pre-approval letter, and your agent is able to help you in a much more effective manner as well.

For instance, with this letter, they may be able to help you to negotiate a better deal due to the fact that you’re a bonafide buyer. Most pre-approved buyers also find that sellers prefer to work with them over non-approved buyers, giving them an edge over the competition.

Another important reason why you need a pre-approval letter is that it clarifies the amount that you can actually afford to borrow. This will make it easier to search for your next home and can save you from the heartbreak of falling in love with a home that you simply can’t fit in your budget. Making this even better is the fact that pre-approval can help speed up the closing process by the only having to approve the purchased property.

While a mortgage pre-approval and pre-qualification letter might seem like they are interchangeable documents, they are actually very different from one another and often befuddles even industry members. By understanding these differences, you can avoid major road bumps in the buying process.

The process of pre-qualification only takes a few minutes. A mortgage pre-qualification gives you a slight idea of what kind of loan you might qualify for. Being an informal estimate, this is ideal for buyers are in the very initial stages of buying a home.

A mortgage pre-approval is a more intensive process that requires a credit check, financial verification, and proof of down payment, a pre-approval is essential if you’re ready to buy a house. It provides a far more accurate idea of what you can afford so you can begin looking at homes within your realistic price range. A pre-approval letter will also declare your purchasing power once you do find a property that you like.

Unfortunately, the term of pre-qualification and pre-approval are being used interchangeably and there is always great confusion between the two. At the end of the day, the lender is the only entity that can actually approve a mortgage and it’s best to get a mortgage pre-approval commitment letter from them.

A mortgage commitment letter is going to cover all the conditions that need to be in place for the mortgage to be funded, which makes the mortgage commitment letter a more valid document than anything else.

Interest rates tend to fluctuate based on many variables and lenders are only able to guarantee to the home buyer a fixed rate for a short period before buying a house. Typically banks provide a “rate-hold” for 90-120 days after pre-approving someone for a mortgage.

Receiving a guaranteed interest rate until you find your new home is another benefit of getting a mortgage pre-approval/commitment, but you need to be careful about not to do things that could jeopardize your pre-approval.

Although having a mortgage pre-approval is security knowing how much you can afford, there are rules and stipulations you must follow once your approval is finalized. In most situations, you must pay very close attention to your finances and major life-changing events such aschanging jobs or befriending a cosigner. This means continuing to make payments of your credit obligation on time and avoiding any new loans or credit cards that may affect your credit score.

Any changes that occur in the time between having your offer accepted and closing can cause a re-examination of your pre-approval and result in a derailed loan. With the utmost certainty, lenders will verify employment and creditworthiness just prior to releasing the funds. Some specific activities you should avoid include:

As you can see there are many elements of buying a home and being well prepared in advance is going to serve you well along your journey. Having a mortgage pre-approval letter in place is not a prerequisite to purchasing real estate.

Although sometimes it can be perceived as an extra hoop that others just want home buyers to jump through. By now I trust that you can see that foremost it is really going to benefit the home buyer by being organized and having the right mortgage team in your court.

Be sure to ask your real estate agent for references and recommendations of banks and mortgage brokers that their clients had a great experience working in the past. You can have peace and comfort knowing that they will only steer you towards those individuals who provide an exceptional job to get your mortgage approved.