Before you start shopping for a home, you need to work with a lender to get pre-approved for a mortgage. Pre-approval is basically a promise from the lender that you’re qualified to borrow up to a certain amount of money at a specific interest rate. This promise is subject to a property appraisal and other conditions, but it is essentially your golden ticket to ride around town looking at gorgeous homes.
In the pre-qualification process, you spoke with a lender, briefly, maybe even over the phone, and he or she gave you an estimate of what you’ll probably be able to afford. Now, in the pre-approval process, the lender is going to take a much closer look. They’ll want that credit score we’ve spent all last month raising, and they’ll need to verify your income. They’re about to loan you a ton of money. If they’re smart, they’ll want proof that you can, and will, pay it back.
When you’re pre-approved for a mortgage, it means that a lender has looked closely at your credit report, your employment history, and your income and has determined which loan programs you qualify for, the maximum amount that you can borrow, and the interest rates you’ll be offered.
In order to get pre-approved, you’re going to need a few things:
- Your last two years’ tax returns and W-2s.
- Your most recent pay stubs.
- Your bank account statements.
- A signed authorization to order your credit report.
Once verified, the lender will then give you a pre-approval letter, stating that your loan will be approved once you make a purchase offer. That pre-approval letter means that the lender is confident that you can make the necessary down payment and that your income is sufficient enough to cover the mortgage payments. At this stage, only one concern remains. The lender needs to make certain that the property’s value offers sufficient collateral in relation to the loan amount. In other words, the home must be appraised for an amount more than, or equal to, the purchase price. But that’s a lesson for another day. For now, here are some reasons why the pre-approval letter is so important to both the listing agent and the buyer’s agent.
1. You’ll know exactly how much money you qualify to borrow. Most people have a rough idea of how much they would feel comfortable paying every month on their mortgage. However, most people forget to add in many key factors such as down payment percentage, mortgage insurance, property taxes, home warranty, adjustable interest rates, car payments, insurance, credit card bills, alimony, child support… and so on. Therefore…
2. A pre-approval letter is far more reliable than a pre-qualification letter. Getting a pre-qualification letter is easy. You just call a mortgage broker or lender, provide some basic financial information, then wait a few minutes for the letter to be emailed to your phone.
A pre-approval letter, on the other hand, involves verification of the information. Rather than taking your word on faith, the lender needs documentation to confirm your employment, the source of your down payment and other aspects of your financial circumstances. This additional due diligence is exactly why the pre-approval carries more weight, which is why…
3. You’ll have more leverage in negotiations with the seller. Sellers often prefer to negotiate only with pre-approved buyers because they’ll know for certain those buyers are financially qualified to obtain the financing needed to actually purchase the house. A pre-approval letter is especially favorable in a close, multiple offer situation, which is exactly what we are seeing in the market now. Theoretically, you can make an offer in the billions if you want, but if it hasn’t been pre-approved, it is literally not worth the paper it is written on. So, with a pre-approval letter, your offer moves to the top of the stack and…
4. Escrow runs much smoother and could even lead to a faster close. Because there is no window period while your loan application is processed, the lender can speed up the entire processing procedure and appraisals can be ordered immediately. It may even be possible to shorten a 30-day closing to two or three weeks, which comes in handy if a seller needs to quickly move and can’t decide which offer to accept. If you can accomplish the seller’s need to quickly close, once again your offer moves to the top of the stack
The pre -approval letter essentially signals all parties involved that you’re a well-qualified buyer who is serious about purchasing a home. Also, the increased likelihood of a closed sale, and a commission, will naturally motivate your agent to devote more time and energy to you. In fact, some agents won’t even show property to buyers who don’t have a pre-approval letter, which is why the pre-approval letter is your ticket to the show.
Next month, we start looking at homes. Bring your checkbook.
Sound like a plan? Call me today to start the process 310-722-5959.
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