Should You Get Pre-Approved Before Getting a Realtor?
Unsure whether to get pre-approved or find a realtor first? Optimize your home buying path with expert timing advice.
For prospective homebuyers, a common question is whether to obtain loan pre-approval before or after engaging a real estate agent. Understanding this sequence can streamline the home-buying journey. This article explores loan pre-approval and its role in preparing for a successful home purchase.
Understanding Loan Pre-Approval
Loan pre-approval represents a conditional commitment from a lender to provide a specific loan amount based on a review of a borrower’s financial standing. It signifies a lender has assessed creditworthiness, income, and assets, determining likely qualification for a mortgage up to a certain sum. This differs from pre-qualification, a less formal estimate based on self-reported information without verification. Pre-approval involves a thorough examination of financial documents and a credit check, making it a stronger indication of a buyer’s financial capacity.
Its primary purpose is to provide a clear understanding of what a homebuyer can realistically afford, setting a defined budget for the property search. It demonstrates to real estate agents and potential sellers that a buyer is serious and has undergone financial vetting. This helps avoid the disappointment of finding a desirable home that falls outside of one’s financial reach. A pre-approval letter serves as tangible proof of financial readiness, enhancing credibility in the competitive housing market.
The Pre-Approval Application Process
Obtaining loan pre-approval requires providing detailed financial information to a lender. Financial institutions like banks, credit unions, and mortgage brokers offer these services. The process begins with a formal application, authorizing a review of your financial history.
Lenders require documentation to assess repayment ability. This includes proof of income (pay stubs, W-2s from past two years; self-employed individuals need two years of tax returns and profit-and-loss statements) and proof of assets (bank and investment statements from recent months for down payment and closing costs).
Information on existing debts (credit card, student loan, auto loan details) is also required to calculate a debt-to-income (DTI) ratio. Lenders prefer a DTI of 43% or less, though some programs may allow up to 50%.
A credit check, often a “hard pull,” evaluates your credit history and score, which can temporarily affect it. The lender uses this information to determine the maximum loan amount, and pre-approval is valid for 60 to 90 days.
Engaging a Real Estate Agent
Having loan pre-approval significantly impacts the interaction with a real estate agent and the subsequent home search. Agents often request proof of pre-approval before dedicating extensive time to showing properties, as it confirms a buyer’s financial capability and seriousness. This allows the agent to understand a buyer’s validated budget, focusing the home search on properties within a realistic price range. This avoids wasting time on homes that are financially out of reach, making the search more efficient for both parties.
The pre-approval letter provides a clear financial boundary, ensuring the agent shows only properties that align with the buyer’s borrowing capacity. This also positions the buyer as a strong contender when making an offer. Sellers and their agents view offers from pre-approved buyers more favorably because it reduces the risk of the deal falling through due to financing issues. In competitive markets, pre-approval can provide a significant advantage, often being a deciding factor between multiple offers.
Once pre-approval is secured, the buyer provides the letter to their real estate agent. This document serves as concrete evidence of financial readiness, streamlining the offer process. With financial vetting completed upfront, the loan approval process can proceed more quickly once a specific property is identified and an offer is accepted.