Congratulations on making the decision to buy property in the area. This is an important decision for anyone, but it doesn’t have to be a stressful experience. My goal is to guide you through this process with a high degree of professionalism – I will be your advocate and resource, providing clear communication and timely responsiveness.
Now that you’ve decided to buy a house, what’s next?
Getting pre-approval for a home loan should be your first step if you’re serious about buying a house. This allows you to get serious about targeting a home within your budget and price range. You’ll know what you can and can’t afford, preventing you from wasting your valuable time. In a competitive real estate market, having a pre-approval letter in your back pocket is something you can’t afford not to have.
Keep in mind that there is a big difference between being pre-approved and pre-qualified. With a pre-qualification, the lender is simply making an estimate of the size of loan a buyer might qualify for, based on some basic information given by the borrower (e.g. employment, income, asset information, current monthly debt, and credit worthiness). Often times, the amount of the actual loan a borrower ultimately qualifies for is less than the pre-qualified amount stated by the lender.
Pre-approval gives you leverage when negotiating with the seller of the home you are interested in. As a rule of thumb, sellers prefer to negotiate with a buyer who has been pre-approved, since they have the reassurance that the buyer is qualified financially to obtain financing if they choose to buy the home. The pre-approval letter can make all the difference when there are multiple offers on the table as the Sellers primary concern (outside of selling price) is the likelihood that the Buyer can perform and close escrow. Moreover, buyers feel more confident making an offer when they have a pre-approval letter since they know that they are able to obtain financing.
The pre-approval process is not complex, although there is some paperwork involved. You’ll be asked to fill out an application with a lender and the lender will gather a variety of background information regarding your income, employment status, and tax forms. Specific documents you may be asked to submit to a lender for pre-approval include:
- W-2 statements, or 1099s, for the last two years
- Copies of your most recent bank statements for all accounts including checking, savings, etc.
- Recent paystubs from your job and proof of any other income you may have
- Proof of assets such as IRAs, stocks, bonds, or mutual funds
- Note that some lenders require an application fee
Once you complete the process, you’ll receive a pre-approval letter that includes details such as the interest rate, type of loan, closing costs, and your estimated monthly payment. This letter is a non-binding, good faith estimate (and it’s time-sensitive, usually good for about 60-90 days). Keep in mind that being pre-approved does not guarantee that a lender will give you the loan – it simply means than if nothing in your financial situation changes, you’re likely to get a loan. When the seller accepts your offer on a home, the lender that has pre-approved you will then formally approve your loan.
With the wide variety of lenders and lending options available it’s critical to have a knowledgeable mortgage broker working with you to secure the appropriate financing based on your unique circumstance. Please visit my Resources page for some mortgage broker options.
Why is This Important?
For you as a buyer, it is important to have a pre-approval letter for several reasons:
- It will inform you, your realtor and the seller about how much you can afford to spend on a home…thus the size of a mortgage you’ll be able to obtain.
- If there are multiple offers on a property, you will need this to just keep on a level playing field. If you have this pre-approval, you are at least as strong as other buyers on this issue. If you do not have this, it looks poorly on your “readiness” to purchase.
- A seller’s main objective outside of price when looking at offers is to analyze the buyer and to make a judgment on whether the buyer will perform and thus close escrow. Again, having a letter shows confidence to most.