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APPROVAL, PRE-QUALIFICATION AND LENDER LETTERS
Buying a house is not an event, it is a process. In today’s post-bubble real estate market, the process is a little more complicated and sometimes takes longer than it used to.
As the process gets more complicated, having a pre-qualification letter from a local, reputable lender is necessary from a time-sensitive aspect. Not only that, a buyer with a preapproval letter has a competitive advantage. Most sellers will not consider a buyer’s offer if they are not preapproved. Additionally, if they are preapproved by a strong local lender, they are at an advantage over a buyer whose funding source is an internet lender, or worse, an unknown lender.
In a seller’s market like we have been experiencing lately, a buyer needs to be prepared to write an offer quickly, especially if there are competing offers. There are other compelling reasons to be preapproved before you start your home search:
- Bank-Owned properties, or Foreclosures, will not consider an offer from a buyer without a letter from a lender pre-qualifying that buyer for the amount offered. Many times, the bank will insist that the buyer get pre-qualified with their own lenders before they will consider the offer.
- A short sale requires the approval of the third-party(s), the lender(s) who hold the note on the home. They will want to be assured that the buyer will be approved for the loan, so they don’t have to have the home back on the market if that buyer doesn’t qualify for the loan.
- Any listing agent will advise their seller client to require a pre-qualification letter. A seller wants to be assured that the buyer can make good on their offer before tying the home up in a contract and taking it off the market.
- Traditionally marketed homes without the encumbrances of bank approval have the choice as to whether or not they will require a pre-qualification letter with the offer. In this environment with multiple offers a common occurrence, a homeowner would be crazy not to require a lender letter along with the offer from a potential buyer.
HOW TO GET A PRE-QUALIFICATION LETTER
- W2 statements (or 1099 income statements) for the last two years
- Federal tax returns for the last two years
- Bank statements for the last few months
- Recent pay stubs and proof of other income
- Proof of investment income
When a buyer gets a pre-qualification letter, the buyer isn’t obligated to borrow from that lender; it’s just a conditional promise that the lender is willing to make the loan. We always advise buyers to get pre-qualified with a strong local lender.
Remember, it does no good to hide information, it will eventually come out anyway. Borrowers must be completely forthcoming when it comes to their finances from the beginning to avoid any last minute surprises and disappointments.
KNOW WHAT YOU CAN AFFORD
A second but important reason to get a prequalification from a local reputable lender is that you will know very closely what you can afford. If you have filled out an online affordability calculator, that is a good start, but it will only give you an rough approximation. There are more than likely several things that need to be entered into the calculation that you might not be aware of. A lender will be able to more accurately give you a number to go on.
It can be a detriment to start looking for homes in a higher price range than you can afford, only to find that out later. Every house you see afterward can be a disappointment.
PRE-APPROVAL vs PRE-QUALIFICATION
Pre-approval is exactly that. A buyer can apply for a loan and go through the process of getting approved by the lender before they even make an offer on a home. In a competitive sellers’ market, it can be a good idea. Then when a buyer finds a home they want, they can make an offer with not just a pre-qualification letter, but with a stamp of approval. The extra leverage of having the proof that the buyer can get financing may just be the additional tool that makes them stand ahead of the pack when there are competing offers.
Additional Reading: Tips for Making a Loan Application
As a buyer, if you’re a planner, this preliminary step of pre-approval might make sense. However, if you are looking in today’s highly competitive sellers’ market and find your dream home…don’t hesitate. If the home is in great condition and priced well, it may not be available for long. There is always a balance between keeping a cool head and knowing when to jump on the right home. (That’s why you need an experienced agent as your trusted adviser…I know, I seem to say that a lot!)
In today’s times where the process is more complicated, it’s a good idea to get the loan process started as soon as possible. Lenders tell us all the time, the best scenarios happen when buyers are prepared and prompt with their paperwork. With the changes in the process because of new legislation it is absolutely necessary to be prompt on the paperwork.