Unless you are going to pay cash to buy your home, it is extremely important to first get pre-approved for a loan. Before delving into the significance of pre-approval, it is important to differentiate it from pre-qualification, since the two terms are often confused or mistakenly considered the same.
Prequalification is merely an informal estimate of how much house you can afford. Based on your stated income and total expenses, a lender would make an educated guesstimate of the loan amount you would potentially qualify for. A credit check is generally not performed for this process. A debt-to-income ratio is calculated which simply tells how much you should be able to borrow. The loan amount specified in the pre-qualification statement does not provide any credibility with either the lender or seller. If you are in the early stages of your home-buying process, you can use a free pre-qualification calculator from the Internet to get a clear idea of the loan amount you may qualify for.
Unlike prequalification, Pre-approval carries a lot of weight in the mortgage industry and it offers plenty of benefits to the home buyer, which we will outline shortly. Your lender would begin the pre-approval process by performing a much deeper probe of your financial affairs. You will be required to produce hard evidence of your income from employment and other sources such as a business you may own; assets, loans, monthly financial obligations, wage garnishments, tax returns, investments, and bank statements. You would have to pay for a mandatory credit check that the lender would perform for obtaining your credit scores, payment histories and a record of any payment defaults or bankruptcies. The lender would also communicate with your employer to verify employment status, history and current income. The lender then processes all this information and issues you a pre-approval letter, which specifies the exact loan amount they are willing to give you, the interest rate for the loan, monthly payment amounts and other terms.
Arming yourself with a pre-approval letter puts you in the driver’s seat in your hunt for a home. It offers you significant advantages over other buyers that are not pre-approved. Some of the benefits include the following:
· Sellers love you because you are a serious buyer and not just a tire-kicker or looker
· Some sellers and listing agents only accept offers from pre-approved buyers
· Some owners will only show properties to pre-approved buyers
· Since you know the exact loan amount you can get, you can focus your search on homes in that price range
· Realtors and listing agents will take you seriously
· It gives you leverage in the negotiation process
· In a hot market, it gives you the ability to act quickly when you find the right home
· For a seller you are more attractive than a cash buyer because they need to provide bank statements and a letter from their bank as proof of cash in hand, whereas you don’t
· Because of stricter lending practices, your pre-approval may be delayed or denied because of financing issues, and you may lose the opportunity to make a timely offer
· It will force you to get your financial affairs in order upfront, so that you don’t end up scrambling to get it done in a hurry when you find your dream home and want to pull the trigger.
When you are seriously ready to start your home buying process, getting preapproved is the best way to begin. It assures all stakeholders that you are a serious buyer. Just consider this fact. To set up a home showing, the seller, seller’s agent and the buyer’s agent must coordinate the appointment. Sellers may have to make arrangements for baby-sitting, clean the house, and drive away with pets, house guests and elderly parents for a set amount of time. They turn on the lights, cool down or heat up the house to make you comfortable…and hope that you would buy their house. If you are not a pre-approved serious buyer, you are wasting everybody’s time and inconveniencing everyone involved in the house showing process.
When you are ready to make an offer on a house, you must submit the pre-approval letter with it. Be aware that if you are submitting an offer on a REO property, you may be required to get prequalified through a second lender even if you are pre-approved through your lender.
The reason for this is the listing agent or bank may have built a long-term relationship with a lender who they consider to be dependable and whose judgment they fully trust. To smoothly make the sale, the bank will often make prospective buyers to go through a prequalification process through their lender. This is similar to the “second opinion” that people choose to seek while making important decisions prior to going under the knife for a surgical procedure. Since all lenders are not the same and the experience of loan officers differ, the bank uses the second pre-qualification process to vet the sale.
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