Is a mortgage pre-approval letter necessary to make an offer on a house? The short answer is no. However, if you want your offer to be taken seriously and to stand out from any competing bids, this little piece of paperwork can really give you the edge.
"While you do not 'need' a pre-approval letter from your lender in order for your offer to be accepted, I highly recommend all of my buyers present it," says Denise Shur, a Realtor® with 1:1 Realty in San Jose, CA. In fact, "I do not look for homes with my buyers until they have a pre-approval letter from their lender. To me, it's that important."
What is mortgage pre-approval?Basically, a mortgage pre-approval letter is a guarantee from a lender that it's willing to finance your home purchase up to a certain dollar amount, based on financial info you've shared with it, such as your pay stubs and tax returns. Pre-approval should not be confused with pre-qualification.
"These terms are often used interchangeably, but there is a big difference," explains Scott Ricamore, a Realtor with Keller Williams Park Cities in Dallas. "A pre-qualification is provided based on info shared verbally that has not been verified. Pre-approval requires an underwriter to scrutinize your documentation and approve the income and assets for a loan."
For that reason, pre-qualification can be done instantly, while it can take up to five days to be pre-approved. So is seeking pre-approval a good idea for you?
2 times a mortgage pre-approval letter isn't necessaryThe only buyer who definitely doesn’t require a pre-approval letter is one paying in cold, hard cash. Since this buyer doesn't need a home loan, sellers know that they can move forward without fear that lack of financing might hold things up, says Jane Peters, broker and owner of Home Jane Realty in Los Angeles.
Another time when pre-approval might not be necessary is if you're the ideal home buyer—meaning you've got a stable job and a solid credit history. This suggests you'll have no problem getting approved for a loan, so in this case, mortgage pre-qualification may be enough to please the home sellers and their listing agent, at least at the outset.
3 times a mortgage pre-approval letter is a mustYet outside this thin sliver of all-cash offers and impeccable buyers lies a huge swath of people who really should get that mortgage pre-approval letter before they make an offer. See if you fall within any of these buckets below.
If you don't have a pre-approval letter, your offer should include a financing contingency, which binds you to this deal only if you can secure a mortgage. Such contingencies make sellers wary, since closing will hinge on a huge "What if...?" This is why you might want to strengthen your offer by arming yourself with this letter.
How to get mortgage pre-approvalIf you're convinced you must get a mortgage pre-approval letter, make sure you get the best one possible, by shopping around.
"All lenders are not created equal; you’ve got to compare and contrast to find the right one," Ricamore says. "If you need to close quickly, you need a lender that can get it done fast rather than drag their feet. If you need to win a multiple-offer situation, you need a lender that the listing agent trusts." So be sure to ask your lenders questions like how long it will take to get pre-approved, and whether they've worked with particular real estate brokerages in the area where you're hoping to buy.
"One misconception I hear a lot is that if you apply for a mortgage with multiple companies, they'll pull your credit, and that will hurt your score," Ricamore notes. While it’s true that applying for a mortgage will impact your score, "Companies know that rate shopping happens," he says, and "credit inquiries for a mortgage within 30 days are only calculated as one inquiry for the same type of loan."
In other words, there are very few downsides—and many benefits—to getting this helpful letter in hand.
For more smart financial news and advice, head over to MarketWatch.
Stephanie Booth's stories have appeared in magazines such as Real Simple, Cosmopolitan, Glamour, and Psychology Today.
President Donald Trump has long promised to cut taxes in a bid to help the middle-class and spur business growth, but will his newly unveiled tax plan achieve those lofty goals? In fact, some real estate experts express doubt that the changes proposed by the plan will be good for the housing market.
"Middle-class families will not see much tax relief in this plan," says Joseph Kirchner, senior economist at realtor.com®, adding, "In order to pay the large tax cuts to the wealthy, programs that help home buyers purchase homes and help builders bring homes to market will likely be drastically cut."
At issue are income-tax deductions, which reduce an individual's taxable income, and therefore one's overall tax bill. Currently, taxpayers can choose whether to itemize their tax deductions—writing off specific expenses—or take one big standard deduction instead. The new tax plan nearly doubles the standard deduction. Sounds good, right?
But by boosting the standard deduction, the plan renders the mortgage interest deduction nearly useless. Buyers can typically use the deduction to shave $8,000 to $10,000 off what they owe the government in their first year of homeownership, says Kirchner. Still, the bulk of taxpayers are more likely to opt for the standard deduction, which would total $12,000 for individuals and $24,000 for married couples who file jointly.
The plan also eliminates most types of itemized deductions, including payments for state and local taxes—which include property taxes. (It does retain the deduction for charitable gifts—but again, considering the size of the new standard deduction, this will mostly benefit wealthy people who write big checks for charity.)
The plan must still be approved by Congress.
"This proposal recommends a backdoor elimination of the mortgage interest deduction for all but the top 5% who would still itemize their deductions," National Association of Realtors® President William Brown said in a statement. "When combined with the elimination of the state and local tax deduction, these efforts represent a tax increase on millions of middle-class homeowners."
This could make it more expensive to own a home and could drive up prices in pricier, coastal cities, says Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a liberal-leaning think tank based in Washington, D.C.
However, the mortgage interest deduction isn't really what pushes people buy a house, says Roberton Williams, senior fellow at the Tax Policy Center in Washington, D.C. Instead, it encourages those who have decided to buy to spend more money on a larger house, because they are likely to get some of that money back on their tax return.
Details of the proposed new tax code were scant. The number of tax brackets would shrink from seven to three: 12%, 25% and 35%. It is unclear, however, which income levels would be included in each. That's a boon to the ultrawealthy who are currently in a 39.6% bracket, but a fourth, higher bracket could be created. The plan would also raise the child tax credit for lower-income and middle-class families.
"With significant and meaningful tax reform and relief, we will create a fairer system that levels the playing field and extends economic opportunities to American workers, small businesses, and middle-income families," reads the plan crafted by the president and Republican leaders.
But the new tax code would ax personal exemptions, which provide breadwinners deductions of a little more than $4,000 per family member, including themselves. That could hurt parents with several children.
"Many households, particularly larger ones, will have higher taxable income even though the standard deduction is [nearly] doubled, because they're losing the personal deduction," says the Tax Policy Center's Williams.
Clare Trapasso is the senior news editor of realtor.com and an adjunct journalism professor. She previously wrote for a Financial Times publication and the New York Daily News. Contact her at firstname.lastname@example.org.