You've decided it's time to buy a home. You've been advised to contact a lender and get pre-approved, so you reach out to a loan officer, and talk on the phone. He/she asks you a few questions about your income and your debts, and then prepares a "pre-approval" letter for you, based on your representations. You come to my office, proudly clutching this preapproval letter, and you say, "let's find that perfect home for me."
That's normally music to my ears, since buyers who are ready, willing, and able to purchase a home are golden. BUT, before we start looking at properties and making offers on the house that would become your home, let's take a moment and look a little more closely at the situation. What is a "pre-approval letter", how does it compare to a pre-qualification letter, and what purposes do these letters serve?
Let's start with a pre-qualification letter. Today, you'll seldom see a letter labelled as such, but that's more likely what you'll receive. It means that a loan officer has tentatively qualified you for a loan based on your verbal representations. It is not based on a review of your complete financial history: recent pay stubs, bank statements, tax returns, or credit report. It just means that based on what you've said, you should qualify for a mortgage loan IF that information is true and correct.
A pre-approval letter is supposed to be a conditional commitment, based upon a review of your financial history. That means that the loan officer has gathered your most recent paystubs, most recent banking and checking account statements, pulled your credit history, reviewed your total assets, total debts, and has analyzed not just your credit scores, but your overall credit report. Upon review of all those documents, a pre-approval letter should indicate that you are eminently qualified for a mortgage loan, as long as your financial situation doesn't change in the near future. It's conditioned on a couple of other things, like employment verification, and adequate appraisal, but that's standard. It tells you not only that you can get financing, but will determine what price levels you can afford. It tells the Buyer's Agent that you are a qualified buyer, and it tells the seller that you can perform if they accept your offer to purchase.
Let's compare the two types of letters, using an analogy. Have you ever gotten a mailing from Publisher's Clearing House, stating that "you may have already won a million dollars?" All you need to do is complete this form, mail it in, and you may be a winner. That's approximately what a pre-qual letter stands for. It guarantees nothing. On the other hand, say you bought a lottery ticket, checked your ticket numbers against the published winning numbers, and you see that you've matched all the numbers. You've won! That's pre-approval. It's solid, it's meaningful and it's desirable.
So, why am I talking to you about these two very different letters? It's apparent from my language and tone that I am not satisfied with a pre-qualification letter, even if it says "Pre-Approval" on it. As a sales agent who works on a contingent basis (I only get paid when I sell a home), it's so incredibly frustrating to put in so many hours of time and effort in the search for suitable homes, showings, counselling, the writing of offers, negotiating the offers, finally getting an accepted offer, and then to hear from the lender that the loan cannot be appoved. All that work, all that time and effort, would be for naught. But forget about all this, because this process really isn't about me, it's about YOU.
You should be every bit as upset as I would be if this were to happen to you. While my contribution to the home purchase process is largely limited to time and effort, your contribution would be time and effort, too, PLUS you'll have some real money at stake. Say you make an offer on a property, based on your belief that you'll get your financing, and that offer gets accepted. The clock starts ticking as soon as the contract is executed, so you start with the home inspections. You pay the inspector for a home inspection, and perhaps a well and septic evaluation (very common in northern Michigan). You make your application to the lender, and you pay for an appraisal. The inspections can easily be $500-$600, and the appraisal fee is $400. You've also put down a $500 earnest money deposit. So you've contributed almost $1500 to the process. How would you feel if, after spending that money, you learn that the file cannot get past underwriting, and your loan has been denied? Your inspections and appraisal fees are non-refundable; you may be able to get your earnest money back, but it's not guaranteed. Would you be angry that you've spent this money, and it's all for naught?
When the time comes, and you're ready to start seriously looking at Traverse City real estate, please call a LOCAL lender. Don't call some 800 number, or any bank whose name ends in dot com. Call a local lender; if you need referrals, I can provide them. By utilizing local lending professionals who understand northwest Michigan real estate, and are familiar with the loan programs that would serve you best, you'll build a relationship with a person and an institution. Ask that loan officer what he/she needs to give you a solid pre-approval. It will make your life much easier and less stressful.
