Mortgage pre-approval is needed in order to make an Offer in our area. Anyone without a pre-approval appears disorganized, at best, and is likely to be written off by a seller as not worthy of consideration, at worst. The first question from a seller or seller’s agent about an offer is “How much?” The second is either “Are they pre-approved?” or “Can they close on our date?”

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I got a unique question this year from one of my house hunters:

Will whatever data we report in this pre-approval “follow” us to some degree, in the event that it changes?

For example, if my income or M—’s credit rating improves considerably between pre-approval and more concrete action on our part (possibly years down the road), will that lower income or credit rating hurt us because it was known we had worse credit or lower income at one point?

This is a complicated question that no one has asked before. I checked with Loren Shapiro at Washington Trust Mortgage, then answered:

The lender is interested in your income at the time of the loan.

  • If you are on a payroll, in a salaried position, they’ll need a month of paystubs to support your income. What you earned a year ago is irrelevant. If you are self-employed, your income is the average of the past two years.
  • If there is a big difference between the two, you will need to document why the lower amount is not the norm.
  • If you get commissions or bonuses, you will need to show that you will continue to get them, if those funds are counted as your income to qualify for the loan.

Your credit score at the time you apply is what matters. If it was lower in the past, it will not affect a current application.

Every time you apply for pre-approval, that credit check is noted by the credit scoring agencies. In the first month, there will be one ding on your credit, even if you apply to multiple lenders. But the next month, you will get dinged for the additional credit checks you did. If your credit score is on the low side, get advice before pre-approving at multiple lenders. The credit score ding is small the first time, but many of them –monthly or every couple of months — could trigger a bigger ding. (Their algorithm is a moving target.)

Aside from credit scores, any reason not to pre-approve?

There is no other down-side to applying for a mortgage pre-approval when you decide to start house-hunting. Worst case is that you waste a few hours collecting paperwork for the lenders.

Applying for a mortgage lets you find out how the process works. This will reduce stress if you come back some time later to do it again. The lenders do not keep track of previous applications and credit scores as a reference point for a current loan application.

The biggest upside is that if you find what you want, you’ll be a position to buy it. The even bigger upside is that you won’t go house-hunting in a range that is too high.

What’s wrong with looking at higher priced properties?

There is nothing worse for your house-hunting morale than to be looking at properties slightly over your price range (8-15% over).

Your mind can adjust if you walk into an open house that is way over your price range; you are just looking – you know you are not buying that $2M two-bedroom condo. If you are planning to buy a $700,000 condo, a $770,000 condo is going to break your heart. It will be about 10% better, which will make you want it. If you can’t or shouldn’t spend $770,000, that 10% better one will make what you can buy seem 10% less worthy. The feeling will wear off, but why set yourself up?

So knowing what lenders will allow you to borrow helps you get started in a way that helps you get a sense of what you can buy, from the start. Your pre-approval is the accurate way to find out your buying power.