Make Sure You're Pre-Approved Before Looking at Homes
If you are a first time home buyer or have been renting for quite a while, one of the most important first steps in your quest for home ownership is getting pre-approved for a mortgage.
The pre-approval indicates to the person you will be buying the home from that you're a good bet to get the mortgage. While there are no guarantees, a pre-approval letter gives a seller reasonable assurances that you are financially able to get a mortgage.
Remember, when the seller accepts an offer for their home they will essentially be taking it off the market for an extended period of time waiting for the buyer to get a mortgage. Doing so creates risk on the seller's part.
What if the borrower cannot get the mortgage and the owner has already gone ahead with another home purchase? Not a very comforting thought. The pre-approval gives them some assurance that this won't happen.
However, mortgage terminology can be confusing. For example, you need to know the difference between being pre-approved vs pre qualified for a loan. As a buyer, you want to make sure you are pre-approved and not just pre-qualified. The article referenced above shows a comprehensive explanation of how they differ.
In simplistic terms, with a pre-approval letter the lender has done a credit check, verified your income and checked on your employment status. With a pre-qualification letter, none of these things are done.
With a pre-qual you have to give the lender your income and debt. Based on this information the lender verifies you qualify based on these two data points. The problem with this is limited information.
A pre-qualification is worthless without verified information, including your credit score which could prevent you from getting a loan. Lenders give loans based on credit scores and your ability to pay back the loan.
Any good real estate agent is going to insist on getting a pre-approval letter. They do this to protect their seller clients best interests.
In a competitive real estate market, not having a pre-approval at the time of making an offer could prove costly. Sellers who have received multiple offers on their property are not going to be interested in waiting for a buyer to get their act together.
Important Points About Your Pre-Approval Letter
When you get your pre-approval from a lender it should include the following information:
Clearly defined as a pre-approval letter.
The lending institution that is giving the loan.
The type of mortgage program - i.e conventional, FHA, VA, etc.
The amount of money you are pre-approved for.
The terms at which you are pre-approved including the amount financed and the interest rate.
If you have identified the property, the address of the home.
How long the pre-approval is good for.
Contact information for the person who provided the pre-approval letter.
In some circumstances, the borrower may already own a home. If this is the case, it is important for the letter to state the financial circumstances of the borrow related to this property. In other words, is getting a new loan subject to the current home being liquidated?
While being pre-approved is awesome, if you need to sell a home first, this could affect your ability to purchase a home. Most sellers are not going to be interested in someone selling their home as a condition for purchase.
Buying a home takes a lot of time and preparation. Being well prepared is worth it in the long run. One of the biggest fear of any seller is accepting an offer only to find out the buyer could not get the loan. Do your best to take this fear away by presenting the seller with a solid pre-approval letter.