Financing? you may ask, I haven’t even begun looking for my next house, let alone sold the old one. Isn’t it a bit early for financing? After all, I could spend this valuable time looking for a new home or getting my existing home ready for resale!
Why get Pre-approved First?
The reason to put loan pre-approval first is that you don’t know when you’ll find the property you want to buy. You could find it in three or six months or tomorrow. But no matter when you do, you want to be able to act immediately. And pre-approval gives you leverage when you act.
HINT: One of the most important reasons for getting pre-approved is that you can demonstrate to a seller that you will be able to secure financing. This puts you way ahead of a competing buyer who can’t demonstrate this ability. In some cases, it can even be used to leverage a lower price or lower terms, as we’ll see shortly.
What does it mean to be “Qualified”?
Being qualified means someone believes you are likely to get real estate financing. For several years, buyers used statements of qualifications to demonstrate to sellers that they were good candidates for home purchases. The problem is that this qualification is nothing more than a statement of opinion you can get from anyone. The letter simply states that someone, who presumably has looked at your income and credit, has determined, based on what they know about mortgage lending, that you should be able to get a loan. Your real estate agent can give you a qualifying letter. Or your mortgage broker. Or your Aunt Hilda from Brisbane. Or even you, yourself.
This letter really is not worth much more than the paper it’s written on. It says that when you apply for a mortgage, you are likely to get it. In short, it’s just a preamble, a preface, to actually applying for and getting approval. It’s not something you should risk a transaction on (and savvy sellers these days won’t.) It’s not good enough for you to use to commit yourself to selling your old home, let alone buying a new one. In some ways it’s worse than nothing, because if it’s incorrect, it can lead to unsound real estate decisions.
What Is a True Pre-approval?
A qualification is a statement of opinion; pre-approval is a statement of fact. By pre-approving you, a true lender says that you not only can get a mortgage, you’ve got one. All you need is a property to use for collateral. To obtain pre-approval, you go through the process of applying for a mortgage—you fill out an application, put up the $50 or so for a complete (three bureau) credit report, get underwriting approval, and have a lender who’s ready to fund. It’s roughly equivalent to a letter of credit from a commercial bank (except, with a credit letter, no collateral is usually required). In other words, you’ve got a lender standing behind you, virtually ready to fund the money.
A true pre-approval letter can be a mighty force in shaping your future moves. It lets you know that not only can you get a mortgage on a new home, but you know your maximum mortgage amount. In other words, it tells you how big a new home you can afford.
It’s also heavy artillery when motivating sellers. If they sell to you, subject to whatever contingencies are in the contract, the sale is a “done deal.” You’re a sure thing buyer. I’ve been at presentations with sellers in hot markets when two or three offers have come in simultaneously. Typically in cases like these, the offers are all for full price or more. (The buyers know they are in competition with one another and are trying to make the top offer to get the property.) If only one of these buyers has a pre-approval letter, while others only have “qualified” letters, the pre-approval letter often holds sway, sometimes even if the offer is for slightly less!
In other circumstances, sellers who are anxious to sell quickly will accept less than their asking price if the buyers have a pre-approval letter. They feel assured the deal will go through with a minimum of hassles in a very short time. In short, getting a pre-approval letter is a must if you want to be assured you can move ahead with a buy/sell. And it’s a must if you want to have the best chance of getting the property you want at the most favorable price and terms.
Why do It Right Away?
Unlike a letter that qualifies you, which can be typed out in a few minutes, a pre-approval letter takes time. The lender has to check your application, check your credit, perhaps get verification of employment and deposit of funds (your down payment) from a bank. Then it has to all be submitted to an underwriter. Only when this is complete will the lender issue the pre-approval letter. This can take anywhere from a few days (for electronic approval) to six weeks or more if there’s some problem that you must correct.
Get started early; obtaining a pre-approval letter could take longer than you expect. You never know what problems could arise when you attempt to secure mortgage financing. If you start now, chances are you’ll have the letter in hand by the time you make your offer.
HINT: A lender may issue a preliminary pre-approval letter after you’ve completed your application and credit report, but before underwriting approval is obtained. This letter usually states that you are approved subject to underwriting or some other factor. It is a lesser quality letter, but may serve if you are short of time.
Of course, it could be something less esoteric. A credit check might turn up unpaid bills, late payments, or a previous foreclosure or bankruptcy. Presumably, you would have been aware of all these, but sometimes not. There could be a mistake in names. Or the lender might not know that a bill had been paid off. The problem could be that you don’t have enough income to warrant the mortgage amount you are seeking, at least in the eye of the lender (which, after all, are the only eyes that count here). You might have to produce evidence of other income, or switch lenders to get a more favorable down payment amount.
In short, the problems that could arise, and often do, are endless. And you won’t know about them until you actually apply for the mortgage. (Which is one of the big reasons that sellers are so worried about buyers who don’t have pre-approval letters.)
Getting pre-qualified is a very important step in the mortgage process. If you aren’t sure how to proceed, we can arrange to get you pre-qualified at no cost. Contact us today to get started.