The Importance Of Mortgage Pre-Approval
Loan Pre-Qualification vs. Pre-Approval -- Does It Matter?
There is buzz on the street that banks are getting a little skittish about continuing to offer mortgage pre-approval letters (hint: it's related to the fact they don't know anything yet about the property intended to secure the loan).
As long as the real estate market continues to tilt so strongly in favor of sellers, however, borrowers still need to marshal every advantage to demonstrate that their offer is the one a seller should pick. Proof that they can secure financing and get escrow closed in a timely manner will definitely help a buyer stand out in a sea of multiple offers. Historically, pre-approval letters have provided just such proof.
Way, way back in time, pre-qualification letters were the standard. "Pre-quals," as they were called, were and still remain an informal way to see how much you might be able to borrow for your new home. You can get “pre-qualified” these days online simply by filling out a form with your income, your long-term debts, and the size of the down payment you think you can afford.
A lender won't make a commitment to lend to you based on this unverified information, but will provide you a ballpark figure for how much you can spend on a house. Happy shopping, but pre-qualification is not going to impress a seller at offer time.
Pre-approval is (and remains for the most part) a lender’s actual commitment to lend to you. The process involves assembling financial records (checklist here) and going through a preliminary approval process that can take up to a couple of weeks.
Why Get Pre-Approved?
Pre-approval provides you a more definite idea of what you can afford and shows sellers that you are serious about buying. You have gathered all necessary paperwork and it's been formally considered by the lender. The lender has made a determination that you are able to qualify for a certain level of financing and the time period for funding a loan is shortened by this early consideration.
All of this adds up to making you the most qualified buyer in a sea of other buyers need loans to fund their purchase. Being pre-approved may not help agains cash buyers, but then again it might. Those buyers often underbid with offers of short escrows. Seller may find it more advantageous to take your offer with the financing contingency.
Don't let your agent send a pre-approval letter in support of your offer that shows a higher approval amount than the offer! What do you think the seller is going to do with that? Why counter at the higher number, of course! Your lender should be willing to provide a letter with a lower amount for purposes of making a particular offer. If not, contact me. I work with lenders that will.
Don’t know where or how to start the pre-approval process?
Tell me a little about yourself and I can help you get started. I work with mortgage professionals of the highest caliber that I trust with my clients, and I'm uber-picky.