Mortgage Pre-Approval Pros and Cons

by Harmoni Akao 10/04/2020

Image by Mediamodifier from Pixabay

As you enter the home buying process, some people may recommend that you seek mortgage pre-approval. This is typically one of the first steps in the process, and you may view it as something you have little choice over. Yet mortgage pre-approval is not a requirement to start shopping for a house, and it does have a few potential drawbacks to consider. As you make the choice about pre-approval, take time to weigh the pros and cons.

Benefits of Mortgage Pre-Approval

Mortgage pre-approval does two big things for buyers. First, it shows you how much your lender thinks you can afford to spend. This can help point you towards homes that are in your budget. Of course, it’s possible to be approved for more money than your actual budget allows you to spend, but it is a good starting point for budgeting for your home purchase.

Second, mortgage pre-approval gives you strong negotiating power if you make an offer on a home that already has several offers. When a seller sees that you have financing approved, you are a more attractive buyer than someone who does not. There’s always a risk that the seller won’t be able to secure financing, leaving the seller back at the starting gate without a sale.

Drawbacks of Pre-Approval

So if pre-approval strengthens your negotiating position and helps with budgeting, why wouldn’t you want to move forward with it? There are some drawbacks to pre-approval to consider, and the biggest is its impact on your credit rating. Pre-approval requires the lender to pull your credit, and credit pulls do impact your credit rating. If you don’t move forward with the loan using that lender within 120 days, you will need to go through the process again. Multiple credit pulls will lower your credit rating slightly.

A second drawback is the false sense of security that comes with mortgage pre-approval. While most buyers who are pre-approved can get their home loan as outlined in the pre-approval, it’s not a guarantee. It’s possible for mortgage lenders to pre-approve a home loan, only to decide later that the borrower or the home represents too big of a risk. This is a rare occurrence, however. For most buyers, pre-approval is a strong indication that financing will receive approval as well.

Do You Need Mortgage Pre-Approval?

For most buyers, mortgage pre-approval is a good step to take because it provides budgeting guidance and negotiating power. However, it’s not without its drawbacks, and you should understand those as you move forward. To decide the right choice for your needs, discuss your unique buying situation with a qualified real estate agent.

About the Author
Author

Harmoni Akao

A recent transplant from Honolulu, Hawaii, Harmoni is a small business owner turned real estate agent. Her focus is on single-family and small multi-family investment opportunities in Santa Cruz county. Harmoni promotes real estate ownership as a means to a better life- whether it’s an investment in your own primary residence or an investment in cash flowing rental properties. Harmoni is also a licensed agent in Hawaii with extensive knowledge of the East Honolulu and the Waikiki rental markets.

Harmoni’s educational background includes a Japan-focused MBA from ShidlerCollege of Business at the University of Hawaii, undergraduate degrees in Business Administration and Japanese from Pacific University in Oregon and a one-year study abroad program in Osaka, Japan. She owned and operated her own international student housing company in Honolulu for eight years prior to moving to Santa Cruz. Travel, yoga and listening to podcasts are her favorite pastimes in addition to spending time with her husband and two children.