Pre-Approval
vs Pre-Qualified
The
Buyerís Advantage:
Being "Pre-Approved" vs "Pre-Qualified"
Buying a home is the biggest investment most people
will ever make. The traditional process is to look
at homes (usually with a Realtor), find one you like,
maybe calculate some rough numbers with the Realtor,
make an offer and then apply for the financing with
the loan agent that the Realtor uses. Sometimes, the
Realtor will have you meet with the loan agent before
you look at homes, to give you a pre-qualification
letter.
So, whatís wrong with this process? It causes
stress. A lot of it. From the minute you sign on the
dotted line, the clock is ticking. You only have a
short period of time to select a loan program, complete
the loan application package, and obtain loan approval.
Many real estate transactions fall out of escrow because
the buyer (even with a pre-qualification) is unable
to qualify for a large enough mortgage with
acceptable terms, sending you back to begin the process
all over again.
How do you avoid this stress? Get pre-approved for
your loan before you begin to look at homes. And donít
confuse pre-qualification with pre-approval.
Pre-qualification is not a loan commitment from a
lending institution. Itís a loan agentís
opinion that youíll be able to obtain financing,
and is usually based on a quick review of your credit
report and your paystubs. These days, anyone can get
a pre-qualification letter. Quite frankly, itís
not worth the paper itís written on, unless
the seller personally knows the loan agent involved,
is 100% confident that the loan agent can obtain a
loan commitment, and is willing to bet the sale of
their home on it (very rare).
Pre-approval, on the other hand, is a written commitment
by the lender (not the loan agent), that you may borrow
a specific loan amount. To get a pre-approval, you
actually apply for a loan. The loan agent puts together
a "credit package" ñ a complete loan
application, your credit report, complete income documentation,
asset verification and any supporting documentation
needed ñ which is then submitted to the lender.
The lender actually "underwrites" your file
and issues a credit approval, or pre-approval, subject
to finding an acceptable property.
So, what are the advantages of being pre-approved,
rather than just pre-qualified?
Working with a loan agent first allows you to decide
what type of loan product is best for you. When you
already have an accepted offer, and the clock is ticking,
you are in the position of taking whatever you can
get, without being able to really investigate the
loan products available and how they might help you
meet your financial goals.
Getting pre-approved for a loan lets you determine,
in advance, how much money you qualify for, and in
what price range you can purchase. As a result, you
do not waste your time looking at homes that are out
of your financial reach and worrying about whether
you will be able to get a loan.
Taking the time to be pre-approved also allows you
to select a loan amount that is comfortable for you.
Quite frankly, many buyers can qualify for mortgages
that are more expensive than what they really want
to pay. Buyers can find themselves being pressured
to buy a more expensive house than they want simply
because it works on paper. Spending the time to be
pre-approved gives you the confidence that you are
purchasing a home that you can own ñ not one
that will own you.
Having a pre-approval letter from a lender gives you
an edge in a multiple-offer situation. Look at it
from the sellerís viewpoint: They donít
want to keep their home off the market for 30 to 60
days, only to have the transaction fall through because
the buyer couldnít obtain financing. By that
time, a "hot" housing market can cool considerably,
leaving the seller to sell their home in a less-than-favorable
market.
With a pre-approval letter, your offer will carry
considerably more weight than offers with only a pre-qualification
letter or no letter at all. In fact, sellers have
chosen to accept offers of lower dollar amounts from
pre-approved buyers over higher offers from buyers
who have not been pre-approved. With a pre-approval,
they are more confident that the deal will go through.
Pre-approved buyers can close escrow more quickly.
You have already submitted your "credit package"
and had it approved. When a property is found, a "property
package" is then assembled, consisting of the
purchase contract, an appraisal, the preliminary title
report and any required inspections. The property
package is submitted to the lender, loan documents
are drawn and signed, and the escrow is closed. This
portion of the process can take as little as 10 days
(depending on the market and the inspections required).
With the traditional process of finding a home first
and then obtaining the financing, it takes 30 to 60
days to close
escrow.
There is one caution about using a pre-approval letter.
If the letter states a maximum loan amount higher
than the price the buyer is offering for a home, a
savvy seller will counter-offer for the highest amount
for which the borrower has been pre-approved. It is
wise, therefore, to request a letter with a specific
loan amount based on the price you are offering for
the home to present with the offer. A good loan agent,
one who cares about serving your needs, will not have
a problem accommodating this request.
