Appleton Realtor

 

Why Pre-qualification and Pre-approval Helps Your Home Search

When you begin to visit home loan sites, the first question that needs to be answered is whether you want to be prequalified or pre-approved.  Both have advantages, depending on where you are in your quest for a home. To become pre-qualified, you have to submit general information about yourself and your finances to a broker or lender and that based on this unconfirmed data, the lender will issue a pre-qualification loan amount for you. This is not to be mistaken for a letter of approval with a fixed loan amount. That comes later when you allow the lender access to your confidential financial data.

When you go to a site such as E-loan or QuickenMortgage, you are visiting a mortgage brokerage which has multiple national lenders in its database. Even though you fill in the qualifying loan fields with information, you will not be applying for credit just yet.

What will happen instead is that the broker will match the borrowing criteria you have entered to its database of lenders and their underwriting guidelines, and an analysis will result in which your financial position is compared to general lender guidelines.

In many cases, a pre-qualification amount will be lower than the actual loan amount for which you can qualify. The reason is simply that the data is incomplete and not all loan types will be considered. You can, however, get an idea of conventional and adjustable rate mortgages and what the differences would be with a 5, 10, 15, or 20 percent down payment.

Pre-qualification is a comfortable level for you to try if you are at  the stage in which you are examining your finances, addressing your credit, and exploring whether or not you are going to use a broker, direct lender or another type of program. In other words, you are still a long way from choosing a home and making an offer.

When you are ready to start viewing homes with the idea that you would like to make an offer and proceed to settlement within a few weeks, then you are ready to become pre-approved.

A pre-approval is something of a commitment for both sides. First, you agree to a loan. Then you give the broker or lender a check to cover the cost of a credit report search and analysis. The lender may ask for other information such as your last two or three bank statements and pay stubs. Once the credit report is back, the lender should be able to provide you with a loan rate, the APR, lock the loan in for you if you wish, and provide you with a truth-in-lending closing statement which will outline the costs of your loan and what size check you will need to bring to closing. As quick as on-line applications are, the pre-approval loan package still takes about four days to receive. The lender will overnight it to you in most cases.

A word of caution, however. When you pay for a credit check, which can range from $50 to $75, know that this is a fee that will not be returned, even if you don't get the loan. Since this is a one-time fee, the mortgage broker will simply keep looking for a lender until one is found that will have a loan that works for you in spite of your credit problem. A direct lender will have a limited number of loan options and may have to simply turn you down.

A good idea is to check your credit yourself before you apply for pre-approval. Go to ICreditReport.com or some good standing .com that offers a similar service, and see where you stand. If there is a problem, you can work to get it resolved. You will still have to pay a fee to get the credit report when you apply for pre-approval, but at least you won't apply with a cloud on your credit.

The first advantage the pre-approval can offer you is now you have a loan without having a specific property in mind. All you have to do after that is find the right home.

In the home hunting process, pre-approval also offers several advantages. Not only will you have a clearer idea of the amount you can spend, but you can now eliminate all those homes that are not in your range. You may find that being pre-approved opens the door to types of homes and neighborhoods that you hadn't considered before.

You will also be taken much more seriously when it comes time to choose an agent or work with sellers on your own. In a tight market, a pre-approval letter from a lender can make all the difference in whether your offer is accepted by a seller over an equal offer by another buyer. The seller will know that you have already finished with the time-consuming process of choosing a lender and a loan, and that you are ready to proceed to other aspects of the transaction. The fewer contingencies sellers have to deal with the better they like it.

A third advantage is that once you find a home, you can move much more quickly. This is particularly an advantage if the seller has been transferred, has already moved or is moving to another home and will favor a faster closing contract. If it weren't for the lender, you would be able to fly through appraisal, inspection, and closing in a matter of days. But the lender wheels move much more slowly, particularly in busy periods like late spring and summer. A typical closing will take place a month or even six weeks after an offer is accepted. If you are pre-approved, you can cut this time down by almost half, depending on the time of year and how busy the lender, appraisers, and other service providers are.

Remember, a lender will most likely pre-approve you at the top of your ability to buy, which means that homes that you consider must be in that range or lower. If you try to go significantly over your approval rate by more than five or ten percent, you will risk losing the home, and possibly the opportunity to buy a home that would have been more suitable.

One last suggestion, that should be your first step, develop or continue your relationship with a local lending institution.  For starters, they are more likely to ensure your loan and closing take place.  Dealing with someone face to face has so many more advantages I cannot begin to list. 

 
I do this as a living, and I have regular working relationships with banks, credit unions, and mortgage brokerage firms.  If you have any questions at any time, feel free to contact me, either via voice, or email.