“Don’t worry – I’m totally pre-approved!” is something Realtors hear all the time. But then when it comes down to writing an offer on the home of their dreams, they’re exposed when the financing portion of their paperwork comes up. In reality, they may only be pre-qualified, not pre-approved, or maybe they only spoke to a mortgage broker briefly or even shopped rates online (the worst thing they could do!) and assume they’ll be able to get a certain loan.
It’s not hard to see why consumers would be confused, as the process of getting a mortgage loan in conjunction with buying a home can be complex and overwhelming even for old home buying veterans. So we’ll map out some information to clarify:
The difference between a pre-qualification and a pre-approval:
A pre-qualification letter references the loan amount that the lender THINKS you’ll be able to borrow, based on your income and credit profile.
However, it’s important to note that this is usually based on what you tell the mortgage broker, or perhaps old or incomplete documentation.
“I make $50,000 a year, my credit score was 720 last time I checked, and I only have a couple credit cards with small balances” is something a consumer might say in order to start the pre-qualification process.
So a pre-qual is really just an estimate IF everything checks out and there are no significant changes or extenuating circumstances. Of course the mortgage broker will ask questions and encourage you to take the important step in the lending process of pulling credit and providing the needed documentation when they hear this.
A pre-approval, however, does include those steps, using valid documentation and financial facts – not just speculation and generalities – when fitting someone for a mortgage loan.
Why is a pre-approval so important??A pre-approval letter is a reasonable certainty that you meet the requirements of a specific loan, while a pre-qualification is just basic speculation that you might be able to secure some financing, and that it’s not a waste of time for the homebuyer to move forward.
There are plenty of huge benefits for homebuyers that get preapproved, and home sellers, both realtors in the transaction, and the mortgage broker as well.
How does a pre-approval benefit the homebuyer?
Getting pre-approved before you go out and start the home shopping process benefits buyers in a host of ways.
You’ll know you approximate payment, and what price range you will be approved for and can afford.
That means your home search will be much more focused, saving you time and allowing you to really investigate the houses you can actually afford.
If there is a problem with your documentation, like your W2s or paystubs don’t reflect your actual wages, or there is an unexpected negative item on your credit score, for instance, we’ll have time to address this with you, finding a solution that will allow you buy.
Let’s say you find your dream house but you’re not pre-approved. When it comes to submitting an offer, there are often multiple offers so timing is everything. Starting the pre-approval process at that time could very well delay your offer to the point that you lose your chance to buy the home.
Or, if you try to submit an offer without a detailed pre-approval letter from a mortgage broker, the seller (and their agent) probably won’t take your offer seriously and you’ll lose the chance to buy that ideal house.
Even if your offer was accepted without a pre-approval, unexpected hiccups and challenges during the loan process could delay escrow or even jeopardize the deal closing, which might cost you huge money and headaches.
Why a pre-approval makes everyone’s job easier
Remember the famous line in the movie ‘Jerry McGuire’, “Help me help you?” When buyers resist the process and fail to submit documentation for a pre-approval, they are sending signals that they are home shoppers, not buyers. But with a simple and easy pre-approval, they are helping their realtor, and everyone who’s a party to the transaction, help them. Here are some other reasons realtors, sellers, and everyone prefers you get pre-approved:
Real estate deals can be hard enough to close within 30 days with all the steps, negotiations, inspections, and getting a loan approval, so getting pre-approved makes sure they move as quickly and efficiently as possible, closing on time.
The reality is that Realtors run around at 100 miles per hour trying to service clients, close deals, and market their business, and often have to allocate their time judiciously. I’ve found that Realtors will dedicate more time, energy and resources into buyers who are preapproved because they know they are serious and motivated.
A strong pre-approval letter also lets a Realtor do their job better because they can present a stronger offer for the home you want, and also they have more room to negotiate with sellers. That equals a better deal for homebuyers!
What documentation will I need to get pre-approved?
The list of documents we need in order to get you fully pre-approved for a home purchase or refinance is an easy one:
- Credit report (we’ll pull that for you)
- Two years tax returns and W2s
- Bank statements
- Employer names and addresses
- Current mortgage or landlord’s information.
That’s all we need in order to determine your credit score, gauge your total debt, and calculate your debt to income ratio. Once that is done, we can get you a pre-approval for a great low-interest mortgage and determine your monthly payments as well as how big of a purchase price you can actually afford.
How do I get started?
Over all, getting pre-approved at the very start of the home buying process will empower you to get a better deal and have a stress free and seamless purchase. With a simple phone call or friendly meeting we can hammer out everything we need to get you pre-approved so you can move on to the fun part – buying your dream home!