Do I need to get pre-approved?
Old man giving a thumbs up because he was just approved for a loan

Written by Brian Johnson

Engineer, investor, REALTOR®, and Ten Properties owner, I help new investors use data to build their real estate empire. Connect with me today to start building your ten.

February 6, 2019

The short answer is “No”, you don’t have to. Is it in your benefit to? Almost certainly.

Pre-approval, and it’s lesser cousin Pre-qualification, show your ability to afford a loan on a property. At a minimum, this could save you from wasted time looking at properties you can’t afford to buy in the first place. But the best use is in showing your worthiness as a potential buyer. In a multiple-offer scenario, these can mean the difference between getting your offer accepted or losing out to another buyer.

It all comes down to risk. A seller’s primary goal is to sell their house. Unless they find a cash buyer, the new buyer will have a loan. This means that the new buyer will (or SHOULD!) have an addendum to their offer that makes the entire contract contingent on the buyer’s ability to securely close on a loan from a bank. This protects the buyer from being stuck in a contract in the event that the loan falls through. It’s essentially insurance for the buyer, but it comes at a cost. To a seller, this represents a potential risk. If the buyer fails to qualify for a loan, the contract becomes void, and the seller is left with the house and nothing to show for it other than a little option money.

This is where pre qualification and pre approval come in. To a seller, you’ve clearly done your homework and you represent lower risk. Pre-approval is much better than pre-qualification in terms of risk, but both can help you in a multiple offer scenario. Consider this… two offers come in on a house, both at the same price, only one of them is with a pre-approved buyer. Who would you go with?

While pre-qualification and pre-approval are good for every purchaser, they are essential for investors. Real estate investing requires fast timing and competitive offers. Having a letter of pre-approval from your bank allows you to make an offer immediately upon finding a house. It also gives you an edge when competing against other pending buyers, and in some cases, that edge could allow your offer to be accepted even when it’s lower than all others. Again, it all comes down to risk, so the better you can represent yourself as a buyer, the higher chance you have of getting the property.

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