Pros and Cons of Mortgage Pre-Approval

Imagine making an offer on the home of your dreams: three bedrooms, two car garage, great yard, quiet community. Then, imagine having to take back the offer because you don’t qualify for a mortgage large enough to buy the home. You can save yourself the heartache of missing out on your dream home by knowing ahead of time just what size mortgage loan you qualify for. Get pre-approved.

Mortgage pre-approval is like going through the application process before you ever start looking for a home. The mortgage lender looks at your income and checks your credit history, then tells you how much mortgage you qualify for. Many lenders will lock-in this mortgage amount and guarantee that you can borrow that amount, assuming nothing about your financial situation changes.

Pre-Approval vs. Pre-Qualification

Don’t get pre-approval confused with pre-qualification. During pre-qualification, the lender asks some questions about your income and credit history, then gives an estimate of how much mortgage you can afford. However, this estimate can’t be guaranteed because your credit hasn’t been checked and your income hasn’t been verified. If you purchase a home based only on a pre-qualified amount, you could be disappointed later.

Benefits of Getting Pre-Approved

By getting pre-approved, you can save time during the home shopping process because you know certain homes are out of your price range. No sense in looking at the $200,000 homes when you only qualify for the $150,000 mortgage (unless you have the other $50,000 in cash somewhere).

Home sellers take you more seriously when you have a pre-approval letter in hand. They know you have financing secured and are more likely to accept an offer from you than if you hadn’t been pre-approved. If your offer is competing with one from someone who doesn’t have secure financing, you have a better chance of getting your offer accepted.

Pre-Approvals Can Go Wrong

A pre-approval offer isn’t set in stone. There are a few things that can make your final loan amount change. For one, if your credit changes, your loan amount could go down. While you’re shopping for a mortgage, you need to be on top of all your other finances. Pay all your bills on time, don’t add more credit card debt, and don’t apply for additional credit cards. Pretend your credit is frozen for a few months.

If your income changes, your pre-approval amount can change. For example, if you or your spouse loses a job, you may not qualify for the same mortgage amount. In that case, you’d probably want to delay your home purchase anyway.

Don’t expect to get approved for the same mortgage amount if you go with a different lender from the one you were pre-approved with. Lenders don’t usually guarantee pre-approvals from other lenders.

Pre-approval letters usually have a time limit, so if you don’t apply for the mortgage within that time period, you may not get a loan that’s the same amount of your pre-approval. Once you find a home you like, make an offer, and get your mortgage before the pre-approval expires.