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But finding a house probably shouldn’t be your first step in the homebuying process — especially in today’s competitive real estate market. Doing a little work before finding a home will go a long way.
One of the best ways to prepare to buy is to get a preapproval letter before you start shopping for homes.
When a lender gives you an official preapproval letter, it’s stating that it wants you to work with you. The company plans to lend you up to a predetermined dollar amount at a certain interest rate. Once you are preapproved, your rate is locked in for a set amount of time, usually 60 to 90 days.
You don’t have to apply for preapproval to get a mortgage. But a letter makes your offer more appealing to the buyer, which is crucial in the current housing market.
A preapproval letter shows you’re a competitive buyer
Overall, the US is a “seller’s market” right now, meaning there aren’t enough houses for sale to keep up with demand. As a result, buying a home is a more competitive process than it would be if more houses were on the market.
When the seller’s realtor sees a preapproval letter, they know you’re serious about buying the house. They also know at least one lender is already willing to work with you, which indicates your finances are stable enough for you to afford payments on the home.
Having a preapproval letter can give you a leg up over other applicants who aren’t as prepared.
Preapproval letters help you move quickly
So, why not just apply for preapproval once you’ve found the home you want to buy? Because in a seller’s market, houses fly off the market quickly. If you find a house then apply for preapproval, someone may have already bought the home.
Getting a preapproval letter before shopping means you can act fast before someone else does.
Keep in mind that receiving a preapproval letter from one lender doesn’t bind you to that lender forever. You can get letters from multiple companies, or get one letter now and shop around for lenders later. The key is having a preapproval letter early.
Laura Grace Tarpley is the editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. She is also a Certified Educator in Personal Finance (CEPF). Over her four years of covering personal finance, she has written extensively about ways to save, invest, and navigate loans.
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