You are ready to shop for a home but need to know how much you can afford first. Naturally, you want to seek a pre-approval. But is just one enough?
While there’s no magic number that fits every situation, we often recommend that you obtain at least three pre-approvals. This way you know what different lenders offer. Going beyond three pre-approvals may be a waste of time on your part as most offerings are close enough that you’ll start seeing duplicates.
What is a Pre-Approval?
A pre-approval is a letter the lender writes that states the amount of the loan you may receive based on the conditions they state. Lenders provide this letter after they evaluate your credit, income, assets, and liabilities. It is not a guaranteed approval. It does show sellers that you do have the ability to secure financing, though. It’s a great way to get your foot in the door with sellers as it shows them you are a serious buyer. It also helps to keep you on track, knowing how much you can afford.
Again, because it’s not an official approval, you’ll have to satisfy the conditions the lender sets. Usually, it has to do with the property itself. When you ask a lender to pre-approve you, it’s based on a fictional home purchase. The lender determines how much loan you can afford and works the equation backward. In other words, based on your loan and the availability of a down payment, they tell you how much home you can afford.
Some pre-approval letters do include personal conditions, such as verifying continued employment and current income closer to the date of closing. Each lender and borrower will have their own requirements that you must follow.
How Does it Hurt Your Credit?
If you are familiar with credit scores and credit inquiries, you may worry what applying with several lenders does to your credit. Normally, you would see approximately a five-point hit for each inquiry. There’s an exception to the rule, though. If you apply for the mortgage with different lenders within a short period (usually 30 days), the credit bureaus consider it one inquiry. They recognize the need to shop around and find the best rate. Don’t stretch your shopping out over a longer period, though, otherwise, it may count as multiple inquiries.
What Can Different Lenders Offer?
You might think if you shop for an FHA loan, for example, it would be the same for each lender. That’s not the case, though. You’ll likely find different rates and even terms from different lenders.
Although it’s the same program, the lenders determine what you can receive. The FHA sets the basic guidelines, but lenders can add to it. For example, the FHA allows credit scores as low as 580. Some lenders feel that is too risky, so they require a 620. Other lenders, however, may accept the 580 credit score, but hit you with a higher interest rate, more fees, or stricter guidelines.
When you shop around with different mortgage companies, you can see what is available to you out there. It helps you know that you are choosing the best rate and terms for your situation. Sometimes, shopping around can even work to your benefit if you let the lender know. Let’s say Lender A gave you a much better interest rate than Lender B. Sometimes letting Lender B know of Lender A’s rate encourages Lender B to beat that rate. This could give you an even better loan in the end.
The bottom line is that it’s up to you if you want to seek a pre-approval from multiple lenders. We feel that it’s a good idea. It’s like comparison shopping for a car or appliances. You want the best deal available to you. Since you will likely have this mortgage for the next 15 to 30 years, you want the best deal available to you so that you can save the most money in the end.