One of the best things you can do to help ensure your best possible shot at getting the home you want is getting pre-approved. It’s such a smart step in any market but especially in today’s seller market but still, so many home buyers are reluctant to do it. I love helping people. I like the instant gratification I get when I put a smile on their face and especially when I know I've helped them overcome an obstacle like buying a home or selling one. It's a big endeavor and should be approached with the seriousness it deserves. Still...so many people expect too much. Even some buyers think that they can get an agent to drive them around town to look at homes only for the agent to find out they're not pre-approved for a home loan. Then, after the agent shows a little backbone but showing obvious disappointment, the buyer might scream foul, that the agent is pushing them, that they don't like high-pressure tactics...
Look, I hate high-pressure so much in fact that one of my taglines is, 100% No-Hassle, No-Pressure all the time. But still....it really is a waste of time and we try to share this fact with many buyers but they don't see it. Besides the fact that most sellers won't hold the home while you go to see if you can afford it, it's also like bringing an empty wallet to an auction. It's fun to look but you aren’t taking anything home.
In today's low-inventory market, the seller tends to have more leverage in a home sale. This is why it’s so important for you to take a day or two, before actively shopping for a home, to get pre-approved.
So, what does it mean to get pre-approved for a mortgage loan?
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, subject to a property appraisal and other requirements. With this promise backing you and your financing, you’ll be a hundred times more likely to get the home you want.
How does one get pre-approved, you might ask?
During the pre-approval process, the lender looks closely at your credit and verifies your income and then your expenses. If your debt (the amount of money you pay out every month) is below a certain threshold of total income, and you have held your job for a couple of years, and have a decent credit score, you’ll likely to get pre-approved.
So what happens after all of that?
If you’re granted a pre-approved mortgage loan, the lender gives you a pre-approval letter. What this letter does is it gives you the ability to submit proof that you are able to purchase the home with what’s similar to a letter of recommendation from a banking institute.
Why did I say “recommendation” and not a guarantee?
You have to keep in mind that a mortgage pre-approval does not completely guarantee your loan will be approved and is generally only valid for 60-90 days depending on the lender and the loan. Once you make an offer on a house, that is when the true loan qualification and approval process starts, which is why escrow on a home can be anywhere from 1 week to 45 days. If you’re paying all cash like many investors do, you can close as soon as you want almost. But when it comes to financing a purchase, each lender and each loan type need a lot more time to get all of their ducks in a row before clearing a buyer to close on a new home.
I know this is a lot of information and is probably raising more questions. I promise that I’m going to do an updated series that will walk you through the buying roadmap from interviewing a buyer agent to what to bring to the closing table. And this time around, I’ll recruit some professionals in each industry to talk about what’s happening behind the scenes. Still, in the meantime, I am happy to answer individual questions, so just drop them an email to me and I’ll get an answer and have it back to you in a week or less.
Okay...moving on…
So if by this point, if it’s not a guarantee, what Does ‘Pre-Approval’ Mean?
Pre-approval means the lender is CONFIDENT you have the ability to make the necessary down payment and an income that can sufficiently cover your future mortgage payments. At this stage, only one concern remains: the lender needs to make certain 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. Check out my video, Home Inspection vs Home Appraisal to get a little more insight into that after you’re done watching this one.
And, if you’re confused by any of the lingo? Check out our Real Estate Vocabulary PDF. Just follow the link in the description, give me your best email so we can stay in touch, and you’ll be able to download it lickity-split.
So what do you need to have to start the pre-approval process?
Before trying to get pre-approved for a home loan, check your credit reports and credit score. By taking this first step early on, you’ll have a better idea of what kinds of loans and interest rates you may qualify for, and you’ll have time to clear up any errors or problems you find on your credit reports before you start shopping for homes. You are eligible to receive a free credit report from each of the 3 major credit reporting institutes. You can go directly to most of their websites, verify your identity through a series of questions only you can answer, and you should be able to access a downloadable PDF plus have a hard copy mailed to you.
Once all that is cleared up and you’re credit score is where it needs to be for a loan pre-approval letter, the rest of the process is simple. All you have to do is provide your lender with the documentation they require, including:
Income Information, such as pay stubs, tax returns, and W-2s from the previous two years, as well as documents that show additional sources of income (a second job, overtime, commissions and bonuses, interest and dividend income, Social Security payments, VA and retirement benefits, alimony or child support).
Your lender will also likely want to see information about your assets or items of value besides your income. This documentation can include bank account statements as well as information about investments you’ve made. If a family member or friend is giving you money, you’ll also want to bring documentation of this information (including a gift letter, which shows the money is not a loan).
Lastly, you’ll need to bring a valid form of identification such as a driver’s license or passport, and you will need to provide your Social Security number for a credit check.
As we mentioned earlier, your lender will pull your credit information on their own, so you don’t have to worry about bringing it with you. Beyond this, the ball is in the underwriter’s court. Pre-approval used to take two weeks to a month, but with automated underwriters, it can usually be completed within a day or even an hour. It all depends.
Another good note to take right now is that within forty-five days of your first inquiry, you can attempt to get pre-approved from multiple institutions because the lenders will know that you’re only trying to buy one home.
Your credit report will only show a single hard inquiry so long as all of your lenders do their research during those forty-five days. This allows you to shop around and find the best terms which of course you want to do when making the biggest purchase of your life
Why Is it Important to Get Pre-Approved?
When you’re ready to make a purchase offer on a home, both your real estate agent and the seller will want to see a pre-approval letter. This document proves you’ll likely be able to make the purchase and, therefore, can be taken seriously.
It’s almost equivalent to having the cash and in a competitive housing market, sellers won’t even waste their time on anyone but a pre-approved buyer.
Before wrapping this video up, I want to tell you about getting pre-qualified for a mortgage. There is a difference between the two (a pre-approval vs a pre-qualification). A pre-qualification is an informal process where you are interviewed by a mortgage professional about your assets, income, and expenses. This process gives you a general idea of the price range you can afford but it’s not backed by anything substantial. It doesn’t bring you any closer to securing a mortgage, but it does give you insights you may not have had otherwise.
Going after a pre-approved mortgage loan is crucial in your home-buying process. Even if you think people will trust your word and background, having that official documentation greatly increases the appeal of your purchase offer for most sellers.
And if your first application gets rejected, it is possible to get a second opinion from a different lender I’ve seen buyers get rejected by one institute and then given the thumbs up by another. I’ve also seen buyers get pre-approved for a small amount then try another competitor and get approved for almost 75,000 more. So you never know. Just like you should talk to multiple realtors before going with the one to work with for 30 days to a year or a lifetime, sit down with several and see who offers you the best service.
That’s it for today’s video. I hope you got a lot of insight out of it and remember if you have questions that weren’t answered in this video, leave a question in the comment area and I’ll get you an answer if I can’t answer it right away. Also, you can call, text, or email me at any time.
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That’s it...I’ve talked enough. Thanks again ya’ll and have a good one.