Many times when I first meet a new client wanting to purchase a home they have already spent time online looking at homes and have picked out a few that they want to tour. That is the point where most people decide that they need a real estate agent. I’ll setup the tour and spend the day showing them properties and at some point during those tours the topic of whether or not they are pre-approved for a mortgage will come up (or I’ll bring it up). A small percentage of buyers will have already talked with a lender and have some type of pre-approval letter, most will not have done that yet, and another small percentage will tell me that they will get to that when they find a house that they like. Here are some things that I know, that many buyers may not, about how being pre-approved will affect your home buying experience:
- There is a difference between Pre-Qualified and Pre-Approved. You can go online and submit a form on a lender’s website and print out a Pre-Qualification letter. Most seller’s agents know to disregard this kind of a letter because none of the information entered has been verified and the letter is not really an indication of a buyer’s ability to purchase. In order to get a Pre-Approval letter your lender will have at least checked your credit, verified your income and looked at your bank statements to see that you have money saved for the down payment.
- Lending rules are tighter today than they have ever been. You may have purchased a home before, and getting a mortgage was as easy as telling the loan officer how much you made, but those days are over. Lenders today are working under increased regulations from the Dodd-Frank Act and the Consumer Financial Protection Bureau and that means that buyers have to provide extensive documentation regarding their employment, their bank accounts, their living expenses, their tax returns, etc. I frequently have buyers ask me why the lender is asking for so much documentation and the answer is that they have to. There are also issues with identity theft and credit report errors and, until you pull your credit you have no idea what might show up on the credit report that isn’t even your debt. What all of this means is that getting pre-approved is often not a short process and it is best to start early.
- Seller’s agents will require a pre-approval letter in order for you to make an offer. They do this to protect their clients from unprepared or unqualified buyers. If a buyer cannot present a Pre-Approval along with their offer they are in a much weaker position relative to other buyers. You may spend time house hunting and find the absolute perfect new home for you and your family only to lose the home to another buyer who was Pre-Approved. I see it all the time.
- There are many different loans out there. Mortgage loans come in all shapes and sizes with different interest rates and down payments and mortgage insurance and fees. You need time to talk with your loan officer about your options to make sure you select the right loan. Sometimes just waiting a month can result in a change to your credit score that willqualify you for a lower interest rate. If you’re already in a contract to purchase a home, you won’t be able to wait.
- If your loan is not approved, you will lose money. By the time your lender submits your file to underwriting for final loan approval, you will already have spent money on the option fee, the inspection and the appraisal. Those items can easily add up to $750 or more. In the middle of a contract is not the time for your lender to be checking your credit or finding out that half of your income is from overtime pay. A good mortgage loan officer will check all of those things before you get into a contract to make sure that there are no surprises.
When your real estate agent asks if you are Pre-Approved, they are doing it to make sure that you are in the strongest possible position when you start making offers on homes. Buying a new home is emotional enough when it goes well. There is no reason to suffer the heartbreak of losing out on a home that you love just because you were unprepared.