Buyers, Before You do Anything Get Pre-Approved!

Why? How? And warning to those who don't think they need to:

Two very important reasons: #1 In this very tight market where inventory is low and multiple offers are common, the only way your offer will be even considered by a seller and their agent is if you have been previously “pre-approved” by a lender. If you have not previously gone through the process, which can take several days (especially if you are self-employed), the seller will have most likely accepted another offer before you even have time to present yours.

In addition, in today’s COVID world, most listing agents won’t even show you the home by appointment if you cannot first prove that you have been pre-approved by a reputable lender. #2 You might think you know how much the bank will lend you based on what you think you can afford to pay per month but banks have very complicated and unexpected ways to determine how much they will be willing to lend you. So, before you go looking for homes in a certain price range, shouldn’t you know for sure how much the bank will actually lend you (in addition to your down payment)?

Bottom line, buying a home is a very important step in your life. So take it seriously and be ready because if you’re not, other buyers will swoop up the perfect property right from under you and you might regret it for a long time.

What is a Pre-Approval vs. a Pre-Qualifying Letter?

Pre-qualifying can be done by answering some key questions over the phone to loan officer at the bank or to a mortgage broker. A pre-approval is a much more thorough process and because of this, some buyers feel it’s too much work to do until they actually find a house they like, but this approach will only hurt them in the end. Since you’re going to have to go through the process anyway, why not do it up front and be ready?

In addition, when competing against other buyers, the seller and their agent will always give preference to an offer that has a pre-approval letter vs a pre-qualified letter. In today’s market where inventory is low, finding a home takes time and effort. It would be a shame to miss-out on a home if you aren’t ready to make a strong offer.

What is a FULL pre-approval?

Some lenders will even go as far as to assure you “FULL Pre-Approval” meaning that the pre-approval has gone to underwriting which is an extra assurance that your financing will go through. In these cases, a “Full Pre-Approval” is almost like offering cash to a seller because the financing is certain. This can help speed up the buying process by offering a faster closing which can be very attractive for sellers especially when looking at a multiple-offer scenario. A “Full Pre-Approval” allows you to make an offer with confidence and shows that you’re a serious buyer with the means to purchase a seller’s home.

An Example and a Warning:

New clients of ours, we will call them “Jane and John Smith “ wanted to buy their first home and felt that their monthly income combined with their down payment would qualify them. Additionally they told us that all they were confident their finances were in order.

When it came time to talk to a mortgage lender, it came to light that that John had just changed jobs and is now freelancing as a video editor. Because he is self-employed (less than 2 years on the new job), and has a lot of write-offs, he is not showing enough monthly income to qualify for a loan. He also needs to show his last 2 years of income tax returns along with a P&L (profit and loss statement for his solo business). What they thought was a slam dunk, turned out not to be and it looks like they will have to wait another year or two before they are ready to buy.

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Conclusion

When you are first thinking about buying a home, speaking to a lender about your finances and get pre-approved even a year ahead of time is a great approach. This will save you a lot of heartache in the end and get you into a home a lot faster when the time comes. If you need any lender/mortgage broker recommendations, don’t hesitate to reach out to us!