I'm going to keep this blog post pretty short. This one is definitely one of the most self-serving posts that I'll write. However, getting pre-approved for a mortgage by a mortgage lender makes the home buying process easier and more successful for every party involved. This post is not directed at anyone in particular. This is an issue that a lot of us as buyer's agents face and it can cause a lot of buyers to miss out on a house that they really want.
I work with an awful lot of people that are not aware of how important it is to have already had some communication with their preferred lender before they begin looking for a home to purchase. It's not their fault. This is something that has become more necessary in the last few years, yet it doesn't seem to be expressed very often in preliminary discussions with those outside of the real estate industry.
What is a pre-approval? A mortgage pre-approval (also called a pre-qualification) letter is something that a buyer's preferred lender will write up for them once they have run some preliminary figures based on the buyer's income, credit scores and debts. Anyone who is interested in purchasing a home needs to consider who they would like to secure that mortgage through. A lot of people have great relationships with their banking institutions and might want to consider acquiring a mortgage through the same bank that holds their checking accounts, savings accounts, retirement accounts, etc. If that is your preference, go for it! However, a lot of people will utilize a mortgage broker in order to find the right mortgage for them and secure them the best rates that they can. I usually recommend this, especially for first time buyers. Most of the time, your mortgage note is just going to be sold off to another mortgage company anyway. These financial institutions WANT your business, so they are more than happy to look at your finances to see whether or not you're even in the ball park of being a reliable borrower. If you are, GREAT! If you're not, they would rather know before you've made an offer on a house and wasted any of their time. After your lender has run a preliminary check of your finances, they will decide whether or not you seem to be capable of qualifying for a mortgage according to their underwriting procedures. If you are, they will happily write you a "pre-approval letter" or a "pre-qualification letter." Essentially all this means is that your lender of choice looked at your finances and believes that you are qualified to achieve a mortgage through them to purchase a property. The lender will give you a rough limit to how much home you can afford based upon your monthly expenses.
Why does this matter? There are many reasons why this is important. Here is why:
- The biggest reason is that most listing agents and sellers REQUIRE that you submit what we call "PROOF OF FUNDS" with your offer. Proof of funds is basically just a voucher that shows that you as a buyer do, indeed, have access to sufficient funds to purchase that property. This is always submitted with the "earnest money" check or copy thereof. Earnest money is just a deposit that is meant to show the listing agent and seller that you do have money for the extraneous expenses (inspections, appraisals, attorney fees, etc.). If you can't come up with a fractional amount of the listing price, this is supposed to express that you do not have access to the funds needed to purchase that property. Even if you are paying with cash, the listing agent wants to see a bank statement or letter from your bank that says that you have access to the cash to buy that property. The proof of funds letter is just an additional step beyond submitting an earnest money check. Showing proof of funds is quickly becoming industry standard when making offers on properties.
- It's free. It is no obligation. It doesn't cost you a dime and it does not mean that you have to use that same lender later. These mortgage lenders make their living by lending money to home buyers. If you prove to be a reliable borrower, they are more than happy to lend for your purchase. After all, they pocket all the interest. They do not mind writing you a pre-approval if they think you will use their services. In fact, most of them only need a few figures via email or web-form and a 5 minute phone call to know if you are qualified to borrow or not.
- It's makes your Realtor's life much easier. A lot of folks would really love to buy a home. However, they just aren't capable of borrowing the money. There are a myriad of reasons for this and they are almost always financial reasons. I have admitted many times to lacking a decent financial education as a youth. Unfortunately, a lot of adults seem not to have ever developed financial literacy and are not aware of how to handle their finances. This is especially true with credit. I get a lot of calls from people who want to buy, but they don't have "perfect" credit. I encourage them to get pre-approved and once they finally do, I find out that their credit scores are very low due to non-payment, past due payments and high balances. It is vitally important to monitor your credit, keep control of your credit and to pay your balances to things like utility companies and car notes on time! Especially if you ever want to finance anything! Not doing so will get you turned down by a mortgage lender IMMEDIATELY. Low income earners can borrow far easier than those with poor credit. Credit scores are meant to be a track record of borrowers. Poor people that pay their bills on time and fully are much more likely to be approved for a mortgage than someone who makes more but has poor credit. I have known many people to find their dream home only to be quickly denied by every mortgage company around for low credit, absorbent debt and low wages. You can save yourself and your agent an awful lot of wasted time, energy and heartache if you do this right away. Realtors are busy people. I don't get a lot of time to rest throughout the day. There is always someone to meet, some question to be answered and some information that needs to be found (thankfully, all of this can be done from satellite). It is painful when you've spent days or weeks helping someone, found their perfect home and submitted an offer only to find out that they can not secure financing.
- It will make your limitations clear and apparent. One of the purposes of a pre-approval or with working with a lender beforehand is that they will tell you how much of a monthly mortgage payment you can afford. This breaks down to showing you just how much house you can afford, which makes the shopping process much easier. Your pre-approval or your lender will let you know up-to how much home you qualify for. That means you won't be looking at properties well outside of your price range and you will not be heart broken when your lender later tells you that there is no way they can approve you for that home. This sets the right kind of limitations and it can narrow (or expand) your pool of potential properties and help you really narrow in on the perfect home.
The pre-approval process seems limiting, but it is not. In fact, it is meant to help you are as home buyer to begin the process of buying a home by showing you what you can afford (if at all), as well as prove to both your agent and the listing agent that your offer should be accepted because you are a reliable and well-qualified purchaser/borrower. It has become almost industry standard practice to require POF (proof of funds) with any and all offers on available properties. At least 90% of the listings that I look at on the MLS clearly state that all offers must be accompanied by POF and earnest money deposit in order to be entertained. This isn't meant to suggest that your Realtor or agent is skeptical of your qualifications. Not at all. However, most of us have been greatly disappointed to find out that the wonderful people we have been helping for months are not qualified to buy a home after submitting an offer. This is heartbreaking to every one involved, including the lender that breaks you the news.
Moral of the story: GET PRE-APPROVED FOR YOUR MORTGAGE! You probably HAVE to have this in order to make an offer anyways. Why not do it right away and not only know what your price range is, but also prove to your agent/Realtor that you are very serious and qualified. They will reward you by negotiating harder on your behalf and digging deeper to find you exactly what you want!
I have some fantastic lenders that I work with often and highly recommend. Any decent Realtor will be thrilled to send you to their confidants on retainer. If you are interested in buying a home, please get pre-approved. If you do not know where to go, send me an email and I'll let you know who I prefer and trust.
As always, if you are interested in buying or selling a home, please let me know. I would be more than happy to make you happy.
Troy Franklin Gandee