Do I Really Need Mortgage Pre-Approval?

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Real Estate

One of the worst home buying mistakes you can make is finding a home you want to buy before getting mortgage pre-approval.  Good real estate agents absolutely know this and will request your pre-approval letter before showing you houses. 

Do you pull up to the gas pump without taking any money?

Getting pre-approval does not take a ton of time and it isn't hard. Most lenders can pre-approve you in less than a day and you don't need to visit their office. During your initial phone call, ask if they can set you up to provide everything through their secure web portal. Most can. Even for an experienced home buyer, this time spent talking with your lender is sure to be valuable. The mortgage industry is always changing. Different loan programs have different nuances, requirements, and benefits. A reputable local lender knows what questions to ask you so they can get you the best deal on a home loan. 

There are three very common reasons buyers give for not getting pre-approval. Do you hear yourself in one of these?

“I’m going to wait until I find the right home to contact a mortgage company.”
“I don’t need to talk with a mortgage company first. I have good credit. I’ll be able to get a mortgage, no problem.”
“I’m just looking right now. I'm not ready to buy so I don't need a mortgage.”

A closer look at each of these objections

“I’m going to wait until I find the right home to contact a mortgage company.” It is nothing short of disastrous to tour homes you cannot afford to own. When you go up in price, you go up in features. If you start touring homes you want and then find out those homes exceed your budget, you will then be forced to tour only homes that have fewer features, are smaller, are in less desirable locations, and/or are in less desirable condition. You'll be disappointed with everything else you see. The entire home buying process will be miserable for you. Trust me, don't make this mistake. Property taxes, homeowner's insurance, neighborhood / association fees, and "special assessments" are mandatory costs of ownership that add hundreds of dollars to your mortgage payment each month and are specific to each house. With pre-approval you are empowering your agent to help you select only homes you both know you can afford to buy.

“I don’t need to talk with a mortgage company first. I have good credit. I’ll be able to get a mortgage, no problem.” That might be true, but you have no way of knowing that without letting a mortgage lender look at your whole picture to confirm. You may have a decent credit score and a good job, but there are many other factors that can cause you to not qualify for even the amount you're currently spending on your housing payment. For example, your side business income won't be counted as income by your mortgage company if you're showing too much loss on your tax return. There are tens of thousands of underwriting scenarios you can't possibly know about. You also need to know how much it will cost you to close. There are fees and they can vary significantly from lender to lender and loan to loan. You need to take time and choose wisely. 

Nobody is trying to insult you. This is not a reason to get angry. Your Realtor does not get paid to show you houses. They get paid to sell you a house. The many valuable things they do for you before your closing, they do on faith. You want to hire a good agent, right? With your pre-approval you'll get a top agent who will show you as many houses as you want to see, and provide you with knowledgeable professional service. Pre-approval is your show of good faith, and it costs you nothing to get it.

“I’m just looking right now. I'm not ready to buy so I don't need a mortgage.” About 60 - 90 days before you're ready is actually the best time to get pre-approval. Your mortgage lender will guide you through the preparation process. They may be able to help you with strategies that increase your buying power so you can afford a better home. If this is your objection, it is the first thing you need to tell an agent when you speak with them. A real estate agent who is showing homes to a buyer that isn't pre-approved and ready to buy is just running a very expensive taxi / tour guide service. Good, knowledgeable, professional agents won't use their time this way. Talk with your agent openly about your timeline and provide them with your pre-approval. A good agent will immediately set you up with the tools you will need to understand the market and know what types of homes you can afford when you're ready. 

Your pre-approval is your buying power and your Realtor not only has a right to expect you to have it, they have an obligation. Every time you schedule a showing a seller has to drop everything, clean like a mad person, and vacate their home--often with their pets in tow so they're not shopping and eating out while you're touring. You're putting someone to a great deal of trouble to accommodate you. Gone are the days when accommodating showings to unqualified buyers or those who aren't ready to buy yet is acceptable. I often hear buyers say "that's just part of having your house for sale". Actually it isn't. Buyers in the early stages of thinking about it have the Internet filled with YouTube videos and virtual tours, and a wealth of sites geared toward showing off available homes with a great degree of detail. In-person showings are a service specifically for when you are ready to buy so you can examine homes in person to find that right one. If you're truly not ready to buy, showing is not the service you need yet. Don't be secretive or misleading about your timeline. A good agent will work with you on your schedule when you show them that you'll have the buying power when the time is right for you. 

Realtor Safety

Sadly, a huge part of a Realtor's daily responsibility is to meet with strangers and often that meeting happens at the first home the Realtor shows to a new buyer client. You may ask how does requesting pre-approval letter provide any safety for a Realtor? If a buyer has contacted a lender to discuss their mortgage options and obtained pre-approval, the lender has done their research on that buyer.  The buyer has provided their social security number, their employment info, and has verified their identity. Providing your pre-approval letter to an agent who has never met you before says "You can trust me not to harm you." A large percentage of Realtors and those who love them will tell you that fear the Realtor will be attacked by a criminal posing as a buyer is their single biggest work stressor. Is pre-approval really such an outrageous expectation?

Strengthening Your Position in the Negotiation

When buying a home in a seller's market, it’s critical to have pre-approval before you tour homes and make offers. With pre-approval you have a distinct advantage. When a seller receives multiple offers, a common scenario in a seller's market, they will eliminate offers from buyers who didn't provide pre-approval. Once they accept an offer, they are ending negotiations with all other prospective buyers so the first elimination is those who didn't prove they can close. If you thought you would negotiate price first and then provide them with pre-approval, that strategy is likely to cost you the house you wanted.

To keep sellers from knowing how much you can afford during price negotiation, ask your lender provide multiple pre-approval letters with incremental amounts up to the highest you are willing and able to borrow. If you're qualified for up to $500,000 ask your lender to provide 5 letters, starting at $400,000 and going up $20,000 with each letter. Then have your agent submit the letter with your offer that most closely matches the price you're offering. If you're offering $450,000, submit the letter that says you're approved for $460,000. Your lender won't mind. They know this is a negotiating challenge for buyers. 

Final Thoughts
A home is the single largest purchase most people make in their entire lifetime. You don't want to make the mistake of thinking you know more about it than trained professionals who sell and finance homes for a living. A Realtor who requests your pre-approval before showing you homes is representing your best interest, protecting themselves, and complying with industry standards for professionalism and due diligence. That's a Realtor you want to have in your corner.