Ask the Egghead: Why do I need pre-qualification from a lender?

Dear Egghead: My real estate agent insists on me getting pre-qualified for a mortgage before we go house-hunting. Why is it so important?

ANSWER: Getting pre-qualified should be your first order of business because it will establish what your budget is. Your agent doesn’t want to waste their time or yours shopping for $500,000 homes if your budget limit turns out to be $400,000.

This is a good time to discuss the difference between pre-qualification and pre-approval. Pre-qualification is a quick estimate your lender will provide based on numbers you provide, such as income and debts. Later on, the pre-approval process will actually verify the numbers you’ve provided by reviewing your tax returns and credit report.

The home seller you’re negotiating with will take your offer much more seriously if you’ve got a lender pre-qualification letter to submit along with your offer.

Pre-approval will give you a good handle on your borrowing power, your expected monthly expenses, and what interest rate you’ll be able to lock in. Your lender’s mortgage pre-approval offer is usually good for two or three months.

Rates and programs offered by lenders can vary widely, so it pays to shop around. Your agent should be able to recommend two or three lenders (if that is not prohibited by your state) and a review of several lenders is available in this article by NerdWallet.

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