With more homes available and mortgage rates dropping, it might feel like the right time to enter the market. To ensure you're prepared, it's important to get pre-approved for a mortgage.

A lender will review your finances, which includes your W-2s, tax returns, credit score, and bank statements, to determine the amount they’re willing to loan you. Once that's done, you'll receive a pre-approval letter indicating how much you can borrow. Here are two reasons why getting pre-approved is crucial in today's market.

Pre-Approval Helps You Know Your Numbers

Home affordability is beginning to look a bit better, but it's still a challenge. That's why it's smart to have a conversation with a lender about your loan options and how the current shifts in mortgage rates might affect your monthly payment. The pre-approval process is an ideal moment for this discussion. Not only does it help you figure out the maximum amount you can lend, but it also gives you a clearer picture of the financing landscape.

““Consulting with a lender and obtaining a pre-approval letter allows you to discuss loan options and budgeting with the lender; this step can clarify your total house-hunting budget and the monthly mortgage payment you can afford.”
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— Investopedia

Use this information to customize your home search according to your budget. With mortgage rates recently dipping, you might discover that you can afford a bit more for your monthly payment than you initially thought. However, it’s important to avoid stretching your budget too thin.

““In many cases, a lender may preapprove you for more than you need to spend on a home. And while it can be tempting to look at houses outside your budget, it won’t help you in the long run. Before you start touring homes, figure out how much you can realistically afford and stick to your budget.”
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— CNET

Pre-Approval Makes Your Offer More Appealing

Once you find a home that fits your budget, getting pre-approved comes with another significant advantage. It strengthens your offer and demonstrates to sellers that you’ve already been through a credit and financial assessment. When sellers see you as a serious buyer, your offer may stand out more since it appears more likely to succeed. As Greg McBride, Chief Financial Analyst at Bankrate, points out:

““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.”
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— Greg McBride, Chief Financial Analyst at Bankrate

As mortgage rates start to decline, more buyers are likely to return to the market. Although demand is currently low, we could see increased competition soon, especially in sought-after areas. Why not give yourself an advantage and ensure you’re in the strongest position possible when you discover a home you really like?

Bottom Line

If you’re thinking about buying a home, make sure to get pre-approved early on. It gives you a clearer picture of how much you can borrow and shows sellers that you’re serious about making a purchase.