Is mortgage pre-approval necessary?

By Gretchen Lindow,

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If you've ever shopped for a house, or are thinking about doing that in the future, then chances are you have thought about mortgage pre-approval at one time or another.  What is mortgage pre-approval?  Why should you get pre-approved?  Is it just something the banks cooked up to rope you in?

There was a time when I thought that pre-approval was something that banks thought up to get you in the door and then keep you there after they pull your credit report, and get you to bring in all of your verification documents. But now that I've shopped for and bought a house, I have had the time to research mortgage preapproval and understand the value and significance of it.  

Why Get Pre-Approved?

There are several advantages to getting pre-approved for a mortgage. The first is that by getting your preapproval, you can focus only on houses that are within the range of what the bank will finance for you. Secondly, getting pre-approved gives you a leg up over other potential buyers who are not pre-approved. If two people have put in the same offer on a house, the buyer is more likely to go with the person who is pre-approved, knowing that he already has his ducks in a row, and knows what he can afford. From the buyer's perspective, that could make the whole process go more smoothly, with less chance of the buyer backing out because of financing issues. Lastly, pre-approval gives you the chance to shop around for banks, interest rates, and even the loan officer you will be working with to ensure that you found the best interest rate at the bank that is the right fit for you.

It is also important to note that there is a difference between pre-approval and prequalification. Prequalification is a very simple process that takes your word for your income and credit and then estimates what the bank would be willing to finance for you. Pre-approval, on the other hand, requires that you submit documentation proving your income, as well as your credit history, giving the bank a more accurate basis on which to pre-approve you.

Pre-Approval Requirements

Knowing that pre approval gives you a leg up over other interested buyers, what information do you have to give before gaining pre-approval?  Mortgage pre-approval is based on your income, assets, expenses, and credit history. You will have to submit documents verifying this information such as bank statements, two years of W-2 forms and tax returns for two years.  In addition, you will be asked to sign a release allowing the bank to pull your credit history.  

If you're approved, your lender will send you a letter of pre-qualification, valid for anywhere from 30 to 90 days, that states the maximum amount they are willing to finance.  

When to Get Pre-Approved?

It is best to get mortgage pre-approval before you even start looking for a house. Houses tend to get more expensive the nicer they are, and without knowing exactly what you can spend, it can be very easy to fall in love with a house you cannot afford.  Before you start shopping for houses, shop for a bank, an interest rate and a loan officer. Once you have pre preapproval in hand, you'll know exactly how much the bank will finance for you, as well as the down-payment expectation on such a loan, which will allow you to fully realize the financial responsibility of purchasing a house.

Gretchen Lindow is an Accountant for Hilton Hotels in St. Louis, by day. When she graduated with her Bachelor's Degree in Accounting she had $110,000 of student, auto, and mortgage debt to go along with it. Her family was surviving financially, but with the impending arrival of her daughter, and her husband's health starting to fail, she knew that something had to change. As a result, she is a freelance writer and blogger at Retired by 40! At night.

This article was originally published on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: investing , personal finance Stocks
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