Why Pre-Approval is More Important This Year
What Pre-Approval Is
As part of the home-buying process, your lender will examine your financial situation to determine how much they are willing to lend you. According to Investopedia, this includes things like your W-2, tax returns, credit score, bank statements, and more.
From there, they’ll give you a pre-approval letter to help you understand how much money you can borrow. Freddie Mac explains it like this:
“A pre-approval is an indication from your lender that they are willing to lend you a certain amount of money to buy your future home. . . . Keep in mind that the loan amount in the pre-approval letter is the lender’s maximum offer. Ultimately, you should only borrow an amount you are comfortable repaying.”
That final piece is especially important. While home affordability is improving, it remains tight. So, knowing how much you can borrow can help you better understand the financial side of things. This does not mean you should borrow the entire amount. It just tells you what you can borrow from that lender.
This prepares you to make an informed decision about your numbers. That way, you can tailor your home search to what you are actually comfortable with financially and act quickly when you find a home you like.
Why Pre-Approval Is So Important in 2024
If you want to buy a home this year, you will want to work with a reputable lender to make this a top priority.
While more homes are being listed for sale, the total number of available homes remains below average. At the same time, the recent drop in mortgage rates compared to the previous year is bringing more buyers back into the market. The fact that there is more demand than supply creates a tug-of-war situation for you.
It means you’ll likely find you have more competition from other buyers as more and more people who were sitting on the sidelines when mortgage rates were higher decide to jump back in. But pre-approval can help with that too.
Pre-approval shows sellers you mean business because you’ve already undergone a credit and financial check. As Greg McBride, Chief Financial Analyst at Bankrate, says:
“Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns and bank statements. A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.”
Sellers love it because it increases the likelihood that the sale will go through without any unexpected delays or issues. And if you are competing with another buyer for your dream home, why would not you do this to help stack the odds in your favor?
If you’re looking to buy a home in 2024, know that getting pre-approved is going to be a key piece of the puzzle. With lower mortgage rates attracting more buyers back into the market, you can make a compelling offer that stands out from the crowd.