Why Mortgage Pre-Approvals Matter for Buyers and Sellers

By Markets Fool.com

For most Americans, owning your own home means borrowing money from a bank, credit union, or other lender. Going through the loan application process can be a stressful ordeal, especially when it's compounded by the emotions of the home search and price negotiations.

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Enter the mortgage pre-approval. This step in the process is critical and can make the entire homebuying process a whole lot easier -- and not just for the buyer.

For buyers, a mortgage pre-approval is all about confidence
Imagine for a moment that you're on a house hunt. After weeks of searching, you've found the perfect place. It's in the perfect location, it's the perfect size, and it's exactly the style of home you've always wanted for yourself and your family.

Best of all, you think you can afford it.

You make an offer, and it's accepted. Contract and down payment in hand, you stroll to your local community bank to get the mortgage that you're certain you'll qualify for.

Except you're not.

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Your loan application isn't denied, per se, but the bank does refuse to give you all the cash you need. Instead of getting, say, $300,000, it'll approve you for only $250,000. You probably don't have an extra 50 large lying around, so you lose the home.

Adding insult to injury, you may also lose your earnest money deposit, if you made one, on the original offer to purchase.

In the post-financial-crisis world, scenarios like this play out all the time. You can't take your mortgage financing for granted.

That's why getting a mortgage pre-approval upfront is more important than ever.

When you ask the bank to provide you with a pre-approval, it will run your credit report, verify your income, check out your personal financial statement, and give you an upfront idea of exactly what kind of financing it can provide for you. That eliminates the surprise ending in which you come up $50,000 short on your home purchase.

With a mortgage pre-approval in hand, you can house shop confidently with a full understanding of not only your budget, but also the financing terms you're going to receive when you do close on your home.

For sellers, a mortgage pre-approval is all about realism
For many of the same reasons, many sellers today won't accept an offer to purchase from a buyer who doesn't have a pre-approval. This is a smart practice that, in my view, all sellers should adopt.

When selling your home, your objective is to sell the home in a reasonable amount of time for the most money possible. If you accept an offer from a potential buyer without a pre-approval, you're running the risk that the buyer won't be able to get financing.

Maybe the buyer can and everything will work out fine, but it's a pretty big unknown. And the cost of not knowing can be high.

If the buyer runs into trouble, your home will miss out on several weeks of time on the market -- time that could have been spent promoting open houses, showing the house to other buyers, or, if you're lucky, starting a bidding war.

When a buyer makes an offer to purchase your house, you expect that buyer to follow through on the offer. Requiring that all offers come with a mortgage pre-approval is a smart step to ensuring that happens.

Mortgage pre-approval versus pre-qualification
Separate from a pre-approval, banks can also provide you with a pre-qualification. A pre-qualification is similar to a pre-approval; however, it's not nearly as robust or thorough.

A pre-qualification may just be based on a borrower's stated income, with no verification. The bank probably won't run the borrower through enough of its full underwriting process to really say whether it'll approve the loan. It says the bank may give you a loan, but the ultimate decision depends on a whole host of factors the bank hasn't checked yet.

In other words, a mortgage pre-qualification isn't worth much more than the paper it's written on. Buyers and sellers both should skip this step and opt instead for the more meaningful pre-approval.

So what are you waiting for? Go get that mortgage pre-approval!

The article Why Mortgage Pre-Approvals Matter for Buyers and Sellers originally appeared on Fool.com.

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