Pre-Approval focuses your search and shows sellers that you’re a serious buyer.
See that man and woman driving from neighborhood to neighborhood, barging into houses of all kinds and sizes and questioning the occupants?
No, they’re not conducting an FBI man-hunt, although it seems to resemble one as they scour the metro Detroit region in their mini-van. And no, I don’t think they’re casing houses to rob as they seem to be a nice couple however erratic.
Rather, they’re doing some deep searching for their dream home without the pre-approval of a lender.
Pretty shocking, isn’t it? But it’s something that I see all the time: People make up their mind that they’re going to buy a house only to waste time and energy by not having a pre-approval done prior to their search.
What’s more, during these wild searches, people without pre-approval often find homeowners and real estate agents uncooperative and unwilling to give their time to folks who—while earnest—lack the endorsement of a mortgage lender. Some realtors, especially those showing high-end or investment properties won’t even bother with a buyer without a pre-approval.
For many people, their first reaction after deciding to buy a home is to get in their car and start driving, which is the same reaction that I have when I need to buy groceries. Obviously, buying a home is more of a big deal than buying groceries for most people, so we need to plan right and get that pre-approval.
While looking at a house or two without a pre-approval is fine for people starting to test the waters of homeownership and to see if it’s really the right move for them, we must recognize that anything more puts us out on a safari where we don’t have any focus or seriousness in our search, we’re just chasing after the giraffes, elephants, and anything else that happens to suit our fancy.
News Flash: Without a pre-approval, you don’t look like a serious buyer
A critical first step in the home-buying process is obtaining a pre-approval from a mortgage lender. A pre-approval is a first-look verification by a lender that you have the ability to borrow a certain amount of money for a home.
Your lender will provide evidence of your pre-approval to you in the form of a pre-approval letter. The pre-approval letter is a golden ticket in that you now have the documentation to make a serious offer on a house. While you’ll later have to gain final approval by your lender, pre-approval is your admission to the Chocolate Factory.
Awesome! I was just pre-approved for a $200,000 loan! Whoo-hoo! So that means I’m guaranteed the money right?
Grab your umbrella because I am about to rain on your parade: No it does not. Hence the prefix “pre” in front of “pre-approval.” A pre-approval is not a guarantee that the mortgage lender will provide you the loan amount, or any loan for that matter. Your loan is still subject to a final approval which will take place after you’ve placed an offer on a home and the house has been appraised. Only after the final approval and an underwriting process where the loan is secured to the property can you be sure that you’ll receive the loan.
Thinking that the pre-approval guarantees the loan is a common misunderstanding that people have about pre-approvals. This misconception is largely due to mortgage lenders manipulating the idea of what a pre-approval actually is to draw in more customers.
The pre-approval letter is a golden ticket in that you now have the documentation to make a serious offer on a house. While you’ll later have to gain final approval by your lender, pre-approval is your admission to the Chocolate Factory.
It’s also important to realize that not all lender’s pre-approvals are the same in terms of their accuracy or quality. One mortgage lender may have done a more thorough job and their pre-approval ends up being the same as the money they end up loaning you, yet others that are less detailed may be off in their pre-approval estimation. It’s not uncommon for sellers to end up frustrated because the buyer whose offer they accepted can’t get final approval on a loan.
Nevertheless, a pre-approval does a lot for you when you’re serious about buying a house.
A pre-approval gives you buying power. First, it gives you an idea of how much money your mortgage lender is willing to lend you. Knowing how much you’ll be able to put toward a home allows you to do a more focused search for houses and neighborhoods. While you’ll still want to do a thorough search for your future home, the process will resemble less an FBI man-hunt and take more of a targeted approach.
Second, a pre-approval makes you legitimate in the eyes of those people selling their homes and their real estate agents. They will be more likely to give you the time-of-day and be more willing to answer your questions and show off the house.
Lastly, a pre-approval actually gives you the ability to put an offer on a house. You have to put an offer on a house if you want to buy it right? And, the seller will take your offer seriously.
Before your pre-approval, you were the window-shopper 50 Cent complained about in his first album. Now you’re empowered, focused, and signaling to sellers that you’re serious about buying a home.
What goes into the pre-approval stew?
A whole lot of stuff. Your mortgage lender will want a laundry list of documents that provide them insight into what you have, what taxes you’ve paid, and what you’ll earn in the future. The mortgage lender will want “proof of assets.” They’ll want to know what you own (cars, other houses, savings and checking accounts). They’ll want “proof of income” which is often providing your W-2 form, pay stubs, or other receipts proving payments. They’ll also want to know if you have a job, and don’t be surprised if they ask for your employers contact information to verify that you have steady employment.
Your lender will also check your credit. A credit score of 620 is generally the minimum that lenders are looking for in a buyer as of this writing for a conventional loan, although it’s common for some lenders to loan to people with lower scores.
Your lender will also consider your downpayment, or any money that you choose to put down independent of your mortgage. Many mortgage lenders require that you put at least some money down in the form of a downpayment. However, there are some lenders out there who will give you a mortgage with zero money down.
Now that you’ve dropped your financial drawers so-to-speak, this information will be captured in a residential loan application commonly called a “1003.” This loan application can be completed in both paper and electronic forms.
Pre-approval vs. pre-application
Many people get pre-approval confused with pre-application. Whereas a pre-approval is a first step done before shopping for a house, a pre-application is a first step done when shopping for a mortgage.
A pre-application can be had by providing a few bits of information online into an electronic form and having it spit out some ball-park estimation of how much money you might be qualified. It’s valuable in that it helps you pick a mortgage lender by comparing loan options and interest rates. However, it’s not the same as a pre-approval as there is zero due diligence done on the part of the mortgage lender. Once you’ve settled on a mortgage lender, you’ll want to get that pre-approval.