I get calls from buyers every day. Some of them have been pre-approved through a lender while others have not. Those that haven’t often want to start seeing houses right away, before they have started the loan process. These potential buyers get to start seeing houses right away, so why are they at a disadvantage?
What better way to explain than with a realistic scenario. Let’s say that you’ve decided to start seeing houses without preapproval. You end up finding one you like in a great location that fits all of your needs and more. Fantastic, right? Not exactly. It is almost a certainty that the listing agent (or seller) will not even look at your offer without a pre-approval letter with the offer.
Okay, no big deal. You head over to your lender of choice and start the pre-approval process. You will receive a pre-qualification letter but unfortunately that is not going to suffice. You will need to provide your loan officer with all of your income documentation including your tax returns. A day or two passes while before you can gather up all the correct documents but you finally get it: your pre-approval letter. You head straight over to the agent and present the offer again (this time with the pre-approval letter). Trouble. While you were gathering your income information and talking to a loan officer getting pre-approved the seller received another offer from another buyer who already had a pre-approval letter and are moving forward. There is a chance that it will not work out in the end but it is out of your hands now.
So why didn’t the listing agent accept a pre-qualification letter? It comes down to what it means. Pre-qualification means you have contacted a loan officer who has reviewed your credit report. Information you have provided about your income and debt payments have been reviewed. Based on this information, and using the affordability calculations and ratios that we discussed in the very beginning of this Article, the loan officer will determine a given loan amount you should be able to obtain. Based on this information, the lender will provide a pre qualification letter, which shows your borrowing power. You can visit as many lenders as you like and get several pre-qualifications as this service does not cost anything. Although this still does not guarantee lender approval, the odds are much more likely.
Pre-approval is a firmer and more formal commitment on behalf of the lender. During this process the lender does all the work of a full approval except for the appraisal, title search, and underwriting. Once you’ve been pre-approved you can start your search for a new home with more certainty and a big advantage over other buyers who have not been approved. Additionally, sellers are more likely to view you as a solid bet.
So how early should you get pre-approval? Starting the pre-approval process 60 days before you start even looking at homes is not too early. Little problems can crop up that may delay pre-approval. It is not uncommon for it to take 30 days, 60 days, or even more to get these issues cleared up and you can be sure that there will have been another offer on the home you have your eyes in that amount of time.
If you are thinking of buying a home, do yourself a favor, get a leg up on the competition, and talk to a lender as soon as possible. Just remember that neither a pre-approval nor a pre-qualification means you are guaranteed a mortgage. Lenders still need to look at property appraisals, re-check credit before agreeing to make a loan. Still, it's worthwhile to obtain pre-approval as early as possible in the buying process to know how much home you can afford, and to avoid the headaches and embarrassment of not qualifying for a home you have under contract.
Next week we will be looking at how to bullet-proof your home purchase and will provide the dos and don’ts of how to avoid the surprise and embarrassment of not getting final approval of the Mortgage for the home you have under contract.
Buying a home is a big decision, and many buyers consider the financing process complex and confusing. The Bruder Real Estate Team has created a map to guide you along the path to getting the financing you want and need to enable you to buy your dream home.
Check out our home buyer finance guide: