In a previous blog post we discussed getting no obligation pre-qualification before you start looking to purchase a home. Why is that important? Among other things, a pre-qualification shows Realtors® and home owners that you’re at least somewhat serious about buying a home.
Once you’ve become more serious about purchasing a home, it’s time to move into the pre-approval phase so when the time is right, you’re ready to make an offer in today’s fast-moving market.
Truth be told, there is some information floating around the Internet saying you do not actually need a pre-approval before securing a mortgage. Technically this is true, but keep in mind that most Realtors will tell you otherwise. Why?
Simply put, people typically want to sell their home as quickly as possible and don’t want to waste their time considering offers from unqualified buyers. A pre-approval acts as a third-party validation that you have the resources to make a purchase.
Consider this in terms of if you were selling your car and had two interested buyers at your door at the same time. Buyer #1 has the cash in hand, has been looking at cars all day and is ready to buy something now. Buyer #2 has also been looking at cars all day and says they can offer you slightly more money, but it’s going to take them a few days to get back to you because they need to call a friend to see if they’ll give them a loan.
Who would you sell to? Most people would go with Buyer #1, who is ready and able to make the purchase, versus Buyer #2, who may not actually have the financial resources to buy the car.
To secure a pre-approval, you’ll need to provide actual proof of your income, debts you may have and assets available to you. The lender will also run a credit check to verify your financial status and employment information. If you’re approved, you’ll receive a letter of commitment you can show to sellers and real estate professionals to prove to them you’re serious and capable of purchasing a home.
Keep in mind that a pre-approval does not guarantee that a lender will fund the loan for you or that you have to use this lender for your mortgage needs. The appraisal and inspection may uncover issues with the home that could adjust what your mortgage lender is willing to loan you or cause you to reconsider the purchase. Both the appraisal and inspection are key in determining if you should negotiate a lower price or walk away altogether.
What we often see is that some potential borrowers put off trying to secure a pre-approval until the last minute because they feel their credit is poor or they’re going to be turned down. This is a major mistake! Any reputable lender is going to look at your finances, debts, assets, income and run a credit check to verify you can afford your mortgage, so this information is going to come to light eventually.
If it turns out your pre-approval isn’t what you hoped it would be, it’s far from the end of the world. Knowing what you’re pre-approved for can give you a realistic view of what homes you can afford and if you’re not happy with those choices, motivate you to save for a larger down payment or get your credit score into shape!