A pre-approved mortgage occurs when a lender agrees to lend you a specified amount of money before you have found a home.
Getting pre-approved for a mortgage requires that you complete a mortgage application and supply a lender with all the necessary documentation to check your financial background and credit rating. You will then be told the exact mortgage amount for which you are approved. This enables you to make an offer on a home that is not contingent upon obtaining financing.
Pre-approval vs Pre-qualification
A pre-approved mortgage is different than loan pre-qualification. A lender can usually pre-qualify you for a loan with minimal information about your income and credit record. It gives you a starting point for talking about your goals and the different mortgage options available to you.
Mortgage pre-approval is a more formal process than pre-qualification and it usually involves paying a fee.
There are several benefits to getting pre-approved.
A pre-approved mortgage can help you narrow your choices as you are house-hunting by eliminating houses you can’t afford from your list. This can save you time and possibly even anxiety during your search because it allows you to set some parameters.
Mortgage pre-approval also can give you an edge when it comes to making an offer. Because you are already approved, you can move quickly. Also, sellers may look more favorably on an offer that is not contingent on loan approval, especially if you are in a competitive situation in which multiple would-be buyers are making offers.
Calculating how much to spend
Just because you have a pre-approved mortgage for a certain amount doesn’t necessarily mean you should spend that much. It makes sense to figure out what your monthly expenses will be if you assume a mortgage of that size, including expenses such as maintenance, utilities and taxes that could increase over time.
In addition, you will need to budget for closing costs, which are often 2 to 5 percent of the loan. Plus, you will need to pay for the move, which can cost thousands depending on your household goods and how far you are moving.