When Should I Get Pre-approved With A Lender?

When to get pre-approved with a lender prior to buying a home is a big question for every buyer who needs a loan to purchase. In the markets where I work as a Realtor in Northern California: Petaluma, Sonoma County, Marin County, and Napa County, the home buying market can be very competitive and a pre-approval is critical. However, when to get that pre-approval depends on your situation. Before we jump into that, let’s back up a little bit and talk about what a pre-approval even is.

WHAT ARE THE DIFFERENT LEVELS OF LENDER PRE-APPROVAL?

There are essentially 3 types of lender pre-approvals: pre-qualification, pre-approval, and fully underwritten. Let’s go over each.

• Think of a pre-qualification as a preliminary “getting to know you” session between you and a lender. It’s based on an overview of your finances—usually just a self-reported estimate of your income, debts, and assets. Because the lender hasn’t verified your documents yet, it’s not a guarantee of a loan, but it gives you a ballpark figure of what you might be able to afford. It’s a great way to see if you’re ready to start looking without a hard credit pull.

• A pre-approval is much more robust. To get one, you’ll submit actual documentation—think W-2s, bank statements, and tax returns—and the lender will perform a hard credit check. The result is a specific loan amount the lender is willing to give you, pending an appraisal of the home you choose. In a competitive market, a pre-approval letter is your “ticket to entry”; most sellers won’t even look at your offer without one.

• If you want to stand out in a sea of offers, being fully underwritten (sometimes called a “TBD Approval”) is the way to do it. This means an actual underwriter—the person who makes the final “yes/no” decision—has already scrubbed your file and cleared you for a loan. The only thing missing is the address of the house. This makes your offer almost as strong as a cash bid because it proves to the seller that your financing is a sure thing and can likely close much faster than the competition.

DO I NEED A PRE-APPROVAL BEFORE I START LOOKING AT HOMES?

The short answer – from me – is no, though different Realtors have different takes on this. Some Realtors want to make sure they qualify you as being a legitimate buyer prior to spending too much time on setting up tours, reviewing disclosures, etc. I understand this perspective, but I don’t share it. Getting pre-approved for a home is not the most exciting part of home shopping, so many of my clients prefer to hold off on going through the pre-approval process until they’re really serious. I take them at their word that they have decent credit and savings for their down payment. That way we can start having some home shopping fun and see what types of homes really excite them.

WHEN SHOULD I TALK TO A LENDER, THEN?

The absolute latest time in your homebuying process that you should be getting pre-approved is prior to writing your first offer. But, it’s important you talk to a lender far earlier in your process than this. For one, you’re going to want to have a realistic idea of what size loan you qualify for. Also, you’re going to want to be sure you’re comfortable with the monthly payments. Most importantly, your lender – much like your Realtor – is an important advisor and part of your team. I highly recommend that you have conversations with lenders and realtors early so you can learn what kind of professional you’re looking for and build your team. Then, when you’re truly ready to start putting your first offer, you have a team behind you that is ready to act.

WHAT WOULD YOU DO IF YOU WERE ME?

I would interview some lenders early in my process and see who seems most knowledgeable and communicates well. At a minimum, get some numbers from them that we can work with. Are we shopping in the $700,000 range or $900,000 range…it makes a big difference! Find out what they are going to need from you in terms of documentation, and start pulling your records together. If you’re excited to get started and want to get your pre-approval together, go for it! But, if you want to look around a bit first before they pull your credit and such, that’s understandable.

A lot of buyers wait until they find the house on which they want to write their first offer. This, I would NOT recommend. Getting your pre-approval together and everything else it takes to get your offer submitted is more complicated and time-consuming than a lot of first-time buyers realize. Imagine you visit an open house at 4:00 on a Sunday afternoon, and it’s “the one”. Then you find out the Seller has requested offers be submitted by 7:00 pm that evening (trust me, this happens). Now, you’re just hoping your Realtor and lender are available and able to drop everything to make this happen for you. We work magic when we can, but sometimes it’s just not possible to get everything done that quickly, at the last minute and on a weekend. Unfortunately, I have had a few buyers miss out because they were delayed in getting their financing together until it was too late. Don’t let this be you.

CAN’T I GET MY PRE-APPROVAL TOGETHER AFTER I SUBMIT MY OFFER?

Technically, yes. Realistically, no…at least not in my markets. The California Residential Purchase Agreement does allow an option for buyers to submit their pre-approval letter within an optional number of days after offer Acceptance. However, in reality, if you don’t have your financing together at time of offer review, it’s extremely unlikely that a seller will be willing to go into contract with you. How do they know you can do what you’ve promised unless you prove it to them up front? A seller needs to feel secure with what is being offered if they are going to do business with you…if they don’t feel good about it, they will most likely just wait for the next buyer.