How important is a mortgage preapproval?

Have you ever applied for a job? Odds are, if you’re reading this, you’ve probably applied for one, maybe even a few over the course of your life. I ask you this not because applying for a job is in any way equivalent to applying for a mortgage or buying a house. I ask you this because when you applied for that job, you probably put together a résumé that gave a basic summary of the things you’ve done to that point in your life that are relevant to that job posting. What a résumé is to job hunting, a preapproval is to home hunting – a necessary prerequisite that shows you care and have the basic qualifications to move along in the process.

A mortgage preapproval is a resume of sorts. It’s a sign that you are serious about the home-buying process, and that you went through the trouble to have a mortgage underwriter take a look at your financial picture and give you a preliminary stamp of approval that you have what it takes to try to buy a home of a certain price. It certainly doesn’t guarantee that your bid is going to be accepted, and it doesn’t even mean that you are 100% guaranteed to be approved for your mortgage when the full underwriting process occurs later on in the process. But it’s a simple one-page summary stating your basic qualifications to be considered for a home purchase.

The mortgage preapproval tells a potential seller a couple things. First, it tells them that you were willing to go through the hassle of compiling all your basic financial information from all the different places you had to grab it from – bank accounts, pay stubs, investment statements, you dug it all up. Then it also shows that in addition to the short-term effort you put forth there, a lender found you suitable enough to say that they were going to give a preliminary approval to your desire to borrow hundreds of thousands of dollars for them to buy a house. That means that not only was your short-term effort really strong, you probably have some long-term skills to be able to earn and save enough for someone to be willing to lend you a large amount of money.

People have bought homes without a preapproval. If you’re coming in with an all-cash offer 20% over asking price, you don’t need a preapproval since A) you’re not asking for a mortgage anyways, and B) it’s 20%-over-asking-all-cash-where-do-I-sign-right-now? But odds are that you aren’t buying a home with an all-cash offer way over the asking price. You might be making a 10% down payment and trying to meet the asking price. You may have a 5% down payment and need private mortgage insurance while trying to make an offer below the asking price. And in those situations, if you don’t have a mortgage preapproval, you’re most likely competing against other buyers who do, and that means that your offer isn’t going to get looked at. It’s no different than when you send a letter asking for an interview without a résumé. You just aren’t getting through the door unless they have a basic idea of what you’ve done. A mortgage preapproval does exactly that.

So do you need a preapproval? Technically, no. But sellers want to see one since it takes a big chunk of risk off the table for them. They know it’s not a guarantee that you are going to be able to get the mortgage you need, but they know you’re close enough that barring a job loss or your ill-advised decision to take out a massive new loan before closing, you’re on track to be able to make the purchase of your new home. So while you don’t need a preapproval, it’s something that both you and the seller should want, because just like that résumé that you should keep updated every year, it shows a basic level of competence required to get to the next step.