Are you on the journey to owning your own home? If yes, you've probably come across the term "pre-approval" before. Let's chat about what it means and why it's essential if you're in the market to buy a home this year.

What Pre-Approval Is

During the homebuying process, your lender will check out your finances to see how much they can lend you. This typically involves reviewing your W-2, tax returns, credit score, bank statements, and other related documents.

So, once you chat with them, they'll shoot over a pre-approval letter. This handy document breaks down how much cash you can snag for your dream home. Freddie Mac puts it this way:

““A pre-approval is an indication from your lender that they are willing to lend you a certain amount of money to buy your future home. . . . Keep in mind that the loan amount in the pre-approval letter is the lender’s maximum offer. Ultimately, you should only borrow an amount you are comfortable repaying.””

— Freddie Mac

Absolutely, that final point is key. Even though affordability in the housing market is improving, it's still quite restricted. Therefore, having a clear understanding of the amount you can potentially borrow can give you a solid grasp of the financial aspect. This doesn't necessarily imply that you must borrow the entire sum. It simply provides insight into the maximum amount that particular lender may offer you.

This helps you understand your finances better so you can choose a home that fits your budget and be ready to move quickly when you find the perfect one.

Why Pre-Approval Is So Important in 2024

If you're planning to buy a house this year, here's something else to keep in mind: it's crucial to team up with a reliable lender to help you through the process.

Hey there! So, here's the deal - even though there are more homes going up for sale, the total number of available homes is still kinda lower than usual. But, here's some good news - the mortgage rates have been dropping lately, which is tempting more buyers to jump back into the market. With more people wanting to buy houses than there are houses available, it's like a little tug-of-war situation for you as a buyer or seller.

So, what this really means is that you might have more competition from other buyers since more folks who were waiting around before when mortgage rates were up are now deciding to join the game. But having pre-approval can give you a leg up in that situation too.

Having pre-approval tells sellers you're serious since you've already had your credit and finances checked out. Like Greg McBride, the Chief Financial Analyst at Bankrate, puts it:

““Preapproval carries more weight because it means lenders have actually done more than a cursory review of your credit and your finances, but have instead reviewed your pay stubs, tax returns and bank statements. A preapproval means you’ve cleared the hurdles necessary to be approved for a mortgage up to a certain dollar amount.””

— Greg McBride, Chief Financial Analyst at Bankrate

Sellers appreciate this as it increases the chances of the sale progressing smoothly, with fewer surprises or obstacles along the way. Plus, if you're up against another buyer vying for your perfect home, why not take this step to improve your chances?

Bottom Line

If you're thinking about buying a home in 2024, it's important to get pre-approved. Lower mortgage rates are attracting more buyers, so having that pre-approval can give you an edge when making offers.