Should I Get Pre-Approved for a Mortgage Before I Shop for a Home?

Before you look for a house, you should probably find out how much you can spend on one. And you'll need to know if what you think you can afford is in line with what your mortgage lender thinks you can afford.

Would you go to the store to buy pants without knowing how much money you had in the bank or what the limit was on your credit card? Would you spend two hours trying on 45 pairs of pants, only to get to the register and learn that there was no way for you to get the pants?

Would you check the price tag of your co-worker’s pants, the one whose salary you think is similar to yours, and figure you could afford the same pants? How do you know the pants weren’t a birthday gift from a rich aunt? You don’t.

And you wouldn’t dream of trying on pants and heading to the register without knowing your own budget. (Also? Buying the same pants as your co-worker would be a little creepy.)

Looking at your co-worker’s house, or your friend’s house, or your third cousin’s, won’t tell you anything about what you can afford. You have no way of knowing if someone gave them an equity gift, or if they had been saving for a down payment for years. You don’t know if their credit score is perfect, or if they still have student loans. Your debt to income ratio might be better than theirs, or it might not. Mortgages are approved on an individual basis, and no two are alike.

Why Get Pre-Approved?

Getting pre-approval can give you an idea of what you can afford. Many buyers, especially first time buyers or those whose financial situation has changed thanks to a higher salary or an improved credit score, might be surprised to learn what amount they’ll be able to borrow. Having some idea of what you can afford can help you avoid the disappointment of falling in love with a place, only to realize it’s $50,000 out of your price range.

Or it could go the other way. One young couple, after having their second child, wanted to move from their three bedrooms, one bath home to a larger place. Marcus had recently started his own company, and it was doing pretty well. Allison was working from home, saving on childcare expenses, and had recently paid off her student loans. Allison had also helped Marcus out of some credit card debt, and his credit score had improved a great deal since they bought their first home for $135,000. They began looking at homes in the $250,000 range until their real estate agent recommended that they speak with a mortgage broker. Imagine their surprise when they learned they could be looking in the $500,000 range. And because they now qualified for a lower rate on their loan, thanks to the increased credit score and lower debt to income ratio, the monthly payments were less than they had assumed. Their search changed drastically, and they found the perfect place, a home large enough to house the third child who arrived a few years later.

What does a mortgage pre-approval do? 

A pre-approval is not a guarantee. You will have to be officially approved after your offer on a home is accepted by the seller. Many, if not most, offers are contingent on financing, meaning that you will not be held to your offer if you aren’t officially approved for the loan. But wouldn’t it be nice to know that there was a pretty good chance your loan would be approved?

Back in the day, real estate agents used to help buyers through the process, unofficially pre-approving them by looking at their financials, examining their current budget, and doing the math to show them what their mortgage payment might look like in different ranges. Getting pre-approval through a mortgage professional is a slightly more official process, but the end result is the same. Ultimately, you'll need to get approval from your mortgage lender, and the suggested terms from your pre-approval won't count.

While pre-approval isn’t required, it may make things easier. You’ll be able to narrow your home search -- or expand it -- to homes in your price range. You’re also more likely to save yourself the heartbreak and hassle of being turned down for financing once you have your heart set on a home. So should you do it? At the very least, you should explore potential terms with your real estate agent, because that'll make your search easier. Before you know it, you'll find the perfect place, in your price range. Happy house hunting!