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By Dan Bergman, Redfin
Before you start shopping for a home, your real estate agent will likely ask you to get preapproved for a mortgage. While this may seem like an unnecessary step (you're just starting to look, after all), there are actually quite a few benefits. Here's what you should know.
You Need to Get Preapproved, Not Prequalified. Here's the difference: When you get prequalified for a loan, a lender verbally asks you about your income, assets and debts, and then writes a letter specifying how large a loan you would be offered if the information is accurate. Because this is based solely on your say-so, it's seldom taken seriously by the seller.
When you get preapproved, a lender will ask you for income verification, copies of your past two tax returns and other financial documents. While this may seem like a pain, it shows sellers that you're serious about buying – and it also allows you (and a professional) to make a frank assessment of your financials.
You'll Know What You Can Afford. Your lender will tell you exactly how large of a loan they're willing to extend. This amount should be your upper price limit and will allow you to narrow your search to properties you can actually afford.
You Can Start Figuring Out Closing Costs. First-time buyers in particular are often surprised at how many fees and taxes are associated with closing on a home. By having a serious discussion with a lender, you can learn what those costs are and begin to budget for them. Remember, these costs represent cash you need to have on hand for the transaction. Depending on your financial situation, they may cut into your down payment amount, so it's good to know about them upfront.
You'll Be Ready to Make an Offer Right Away. Especially in a tight market, you'll need to make an offer quickly when you see a home you like, and that may turn out to be the first or second home you see. By having a preapproval letter, you'll be able to make an offer that carries weight. The seller will see that your financials have been checked and that you have the money you say you do.
You Can Ask for Closing Credits from the Seller. As you're negotiating the final deal, you may want to ask the seller to offer you a credit for some of the closing costs. It's a common negotiating tool that allows you, as the buyer, to have a bit less cash up front for the closing costs, while still allowing the seller to receive a price for their home they're comfortable with. But, before you ask for these credits, they need to be approved by your lender; once you have that relationship, you can ask.
You're Not Under Any Obligation. Getting preapproved is a way for you to talk with a lender, see what they could offer and get a handle on your financials. You're still in the getting-to-know-each-other stage, and you can actually get preapproved by multiple lenders.
Once you've had an offer on a home accepted and the terms negotiated, then it's time to select the lender who will finance your loan. You're free to shop around for the best deal, even if you've been preapproved by only one lender. In my experience, about half my clients stick with the lender who gave them preapproval.
In other words, preapproval doesn't mean you're locked in. It just shows you're getting serious about buying a home. While it may be less glamorous than attending open houses, talking with lenders early on is a crucial part of your search, and it's one that can't be neglected.
Dan Bergman is a real estate agent with Redfin, a national real estate brokerage. He serves the northwest suburbs of Chicago, where he works to find homes that meet his clients' needs and goals at a fair price. A lifelong Chicagoland native, Bergman enjoys mountain biking, hiking and good coffee. And, of course, he's a Bears fan!