How Mortgage Pre-Approval Can Strengthen Your Buying Position

So what exactly is a mortgage pre-approval? Simply put, it's a lender's written commitment that says exactly how much they're willing to lend you. It's like pre-qualification, but even better -- where a pre-qualification is more of an informal estimate, a pre-qualification is a hard number based on a review of your finances.

Let's compare the two in a bit more detail:

• A pre-qualification is a quick assessment, often gotten online, based on information you provide yourself. Income, assets, and debts all play a factor, and you get a ballpark figure back, which is nice to have but may not make much of a difference to sellers.

• Mortgage pre-approval requires much more documentation and verification, which is directly reviewed by your lender. They don't just look at your income, but also your credit score and employment history, and will then give you a conditional approval for a set amount.

A pre-approval is a big deal for sellers. Why? Because it represents less risk (and sellers love avoiding risk wherever they can).

For one thing, a pre-approval signals that you're serious about closing the deal, not just browsing around. It also means faster negotiations -- sellers don't have to wait for confirmation of your financing, which means the deal can get closed faster (something sellers generally prefer).

A mortgage pre-approval is a great bargaining chip in a bidding war. If a seller sees that you can move quickly and have your financing confirmed, that gives you a distinct edge.

Pre-approval isn't just great for sellers, though -- it's also great for you as a buyer. Here's why:

• A clear budget. With pre-approval, you'll know exactly how much you can afford, which means you don't waste time looking at homes that are out of your price range.

• Agility. In a hotly competitive market, homes can sell fast, which means that you have to be faster. With your financing already in place, you don't have to wait to make an offer.

• Stronger market position. As stated previously, pre-approval gives you more leverage with sellers, whether you're making an offer on a house directly or in an auction situation, you have a stronger negotiating stance.

So how exactly do you go about getting a pre-approved mortgage? The good news is, the process is relatively straightforward, but it will take some preparation ahead of time. Lenders will look at your:

• Income (pay stubs, tax returns, W-2s, etc)

• Credit score (the higher the better, as you might expect)

• Employment (how stable and ongoing your work history is)

• Assets and debts (bank statements, investment accounts, and outstanding loans)

Fortunately, you don't have to do this entirely by yourself -- services like Lower can help you secure a pre-approved home loan with a minimum of hassle.

There are some great reasons to pursue a mortgage pre-approval, but you should know there are some common mistakes to avoid as well.

First, don't overestimate your budget. It's tempting to look at the maximum loan offered and go with it, but you should take into account things like property taxes, insurance, and maintenance.

Second, be honest. Don't provide inaccurate or incomplete information in the hopes of securing a bigger loan. That can derail approval entirely or lead to even worse problems.

Finally, don't forget to shop around. Different lenders offer different rates and terms, so take your time and get all the information before you commit to a lender.

You should also be aware that pre-approval is not the same as the final loan offer. Some things can change before closing! So make sure to avoid major purchases (like cars or furniture) before the deal closes. Also, be careful not to take on any new debts, like additional loans or credit cards. Finally, make sure you keep your lenders updated if anything about your income or job situation changes.

It's a tough housing market out there, and buyers need every advantage they can get. A mortgage pre-approval can be the difference between getting that dream home and watching with regret as it goes to another buyer. By being mindful of common mistakes and maintaining your financial stability, you can bring that dream home within your reach.