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Why be pre-approved for a loan?

Gold seal of approval - pre-approved home buyers with great lenderWhen home buyers are pre-approved for their mortgage, home sellers and their listing agents know that the odds are good that the buyers are truly able to complete the sale.  A strong lender letter gives everyone confidence that the finances are good to go.

Are you pre-qualified, pre-approved, or fully underwritten?

There are 3 levels of letters from a bank, credit union, or other lender:

  • pre-qualified
  • pre-approved
  • fully underwritten pre-approval

There’s a significant difference between these three levels of lender confidence.

A pre-qualification is weak and suggests a minimum amount of documentation has been provided, if any. It may reflect just a phone conversation between buyer and lender. There are more caveats with this type of letter as more remains to be done – anything from running a credit check to having a loan application completed, documents provided, and more.

A pre-approval or pre-approved buyer means that the application has been submitted (likely done over the phone), the credit check has been run, basic income and liabilities have been submitted, and also tax returns for the last couple of years. It is far more substantial than a pre-qual.

A fully underwritten pre-approval indicates that everything for the pre-approval has been done AND the underwriter has done a preliminary check to make sure nothing jumps out as a red flag. It’s one more layer of security for the loan and with this level, the loan is pretty rock solid. That said, even a fully underwritten pre-approval is not a complete guarantee. Even so, it’s the strongest level available for those seeking a mortgage.

It’s all about confidence – whether you’re buying or selling

Buyers and sellers do a courtship dance that aims to give the other side confidence that all the cards are on the table.

For sellers, that means thorough disclosures, pre-sale inspections, lots of photos, and decent access (so that buyers don’t feel rushed and unable to make an informed decision).

For buyers, that means providing the signed disclosures. the proof of funds. and a strong letter from the lending institution. The minimum standard in Silicon Valley is a pre-approved buyer letter. If it’s only a pre-qual, the listing agent and seller will most likely dismiss the offer as frivolous or premature and view the buyer as not quite ready. When sellers receive multiple offers, they will be looking for the highest price and best terms, but above all don’t want anyone or any offer package that looks shaky.

Get your financing sorted out before starting to look at properties

Pick your real estate agent and consider working with a loan officer that she or he knows and trusts. Like real estate sales people, loan officers are not all the same in terms of skills, knowledge, communication, accessibility, and care. If you just go online and fill out a form, it’s the luck of the draw and you may get a great lender or you may get a terrible one.

Being pre-approved means that you’ve got a target mortgage product that you plan to buy (you do “buy” a loan product!) and you know the maximum amount that you can borrow with that product.  It’s best to make these choices before you fall in love with a property that may get scooped up fast. Instead, do the dry work first.  Once you do start looking, you won’t waste time looking at homes you won’t be qualified for- and you’ll be in a stronger position to make an offer as soon as you find something you like.

Selecting the best financing package available is as important as finding a home that meets your needs. Your Realtor can help connect you with a great lender, so there’s no need to go it alone.

How much can you afford?

There are three factors to consider in determining how much you can afford:

  • Down payment
    Most loans require a down payment between 10 and 20 percent of the home price. If you are able to make a down payment of 25 percent or more, you may qualify for special mortgage programs offered by a variety of lenders. If you are purchasing with a VA of FHA loan product, you may have a small down payment and a smaller home buying budget.
  • Ability to qualify for a mortgage
    Most lenders require that your monthly mortgage payment, including principal, interest, taxes and insurance, should not exceed 28 percent of your gross monthly income. They also expect your total installment debt (regular scheduled payments of 6 months or longer debt  –  car loans, credit card balances, etc.), including the proposed monthly mortgage payment on your new loan, not to exceed 36 percent of your gross monthly income.In addition to your gross monthly income, lenders review your employment history, stability, and potential for increasing your income. They also evaluate any additional income, such as bonuses, commissions and child support.

They will request a credit report to verify your debt repayment, outstanding debt, and available credit. They will calculate your assets, including checking and savings account balances, CDs, stocks and bonds.

Avoiding any late payments on credit accounts, and limiting your credit purchases, helps keep your credit report in good standing. If you have items on your credit report that could negatively influence your ability to secure a mortgage, be prepared to explain each situation in writing. You should also consider delaying major purchases until after you’ve moved into your new home.

  • Closing costs
    Closing costs typically range between 1 and 5 percent of your loan amount. These fees are due in cash at the time of closing, or, in some cases, can be included in the loan.

 

Being pre-approved through a reputable lender is the standard of practice in Silicon Valley. We can help you find a good lender with an excellent track record.

Taking the time to become pre-approved, for a mortgage before you begin your home search will put you in a much better negotiating position: your pre-approval assures the seller that the transaction will not be delayed while you secure financing. Better yet, get your financing pre-underwritten. And with multiple offer situations you may want to consider getting a fully underwritten pre-approval.

If you would like to learn more about financing options immediately, please contact us.

 

Related reading

We have over 350 articles that relate to home buying tips on our Valley of Heart’s Delight blog. Check them out!

 

 

 

 

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