Pre-approval is a lot of paperwork. Question for You: Is this statement true? Answer: True. It’s a hefty pile of financial papers. Question: Pre-approval is not really needed. Answer: False. Very False. Your letter of Mortgage Pre-Approval is very necessary when you are house hunting.
A Quick Preapproval Story: All Jason and Marla really wanted were to find that special house. They heard they should get preapproval. But they did not want to do that boring financial work.
Then they found the special house. Ecstatic, they made an offer. The truth is the Real Estate Agent did not even blink as the owner rejected it. The moral of this little story is that Pre-approval is really a prerequisite for making an offer.
The truth about the necessity of Pre-approval is difficult for some house hunters to accept. Jason and Marla really loved that special house, but they lost it. Actually, without preapproval, they never really had a chance to try for it.
Preapproval: the Truth about This Valuable “Letter”
Serious house hunters know better than Jason and Marla. However, loan professionals and real estate agents state that it’s not uncommon for some buyers to try to short circuit the preapproval process.
“It happens every day,” says Patty Da Silva, a real estate agent and owner of Green Realty Properties in Davie, Fla. “I can’t believe I still get offers today without a preapproval.”
As with many other agents and sellers, Da Silva will reject offers from buyers who don’t have preapproval letters from their banks.
Putting the Cart before the Horse
At Bankrate.com, we learn that shopping for a home before getting pre-approved for a mortgage is like walking into a grocery store without a wallet. And yet, Palm State Mortgage Company has seen a large majority of homebuyers who do not know the truth. And that truth is they need a loan preapproval before they go house hunting.
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“Buyers often are eager to start looking at homes and tend to leave what they view as the boring, bureaucratic part of the home-buying process for last,” says Michael Highfield. Dr. Highfield is an associate professor of finance and head of Mississippi State University’s Department of Finance and Economics.
A Serious Definition: Pre-approval vs. Prequalification
So let’s take a look at the definition of a Mortgage Pre-approval, which we have written about previously, but this is a good time to review.
Put simply, “A Mortgage Preapproval is a conditional green light from a mortgage lender that you’re eligible to borrow a certain amount of money for a home purchase.
Likewise, lenders will share this information legally and in writing. Thus you’ll often hear the Pre-approval referred to as a “Pre-approval letter.” Now, do not confuse your mortgage Pre-approval with a mortgage prequalification, even if you hear the terms exchanged.
“A prequalification provides a rough estimate of how much you might qualify for and comes from a surface-level review of your financial information.” But there is nothing rough or general about your Pre-approval Letter.
1. “A Pre-approval is different from a prequalification. On the one hand, with a prequalification, the lender relies on information provided by the buyer…” Therefore, with the buyer’s information, the bank makes a calculation. And upon this “guess,” they decide in a general way about what you (or Jake and Marla) might be able to borrow.
2. On the other hand, with a preapproval, the lender verifies the borrower’s information. Then validates each piece of financial documentation. And then makes a careful determination about exactly how much money it would be willing to lend you.
Dare to Be Taken Seriously When You House Hunt
Remember without a Pre-approval letter, you won’t get to make a legitimate offer on a home. Don’t tease yourself by house-hunting. Do the bureaucratic homework first. “You have to have a preapproval and it must be a real pre-approval.” — “And I call the lender to verify that” Da Silva says.
So, what kind of documentation does a mortgage seeker need to attain this magic key called a Pre-approval?
“The documents to get preapproved are the same documents that you would need to get a mortgage,” says Jordan Roth, senior branch manager for GFI Mortgage Bankers in New York.
Palm State Mortgage Points Out, “if you look at it that way, the early preparation you do is really just advance work that will pay off both now and later. You will need to collect this list of documents:
1. Pay stubs,
2. Your last two years’ W-2s,
3. The last two federal returns you filed,
4. Two months’ worth of bank statements—from all types of accounts,
5. Your current credit report.
Understand at this point, “A preapproval is not a loan commitment, but it helps speed up the underwriting and loan approval process,” Roth says.
Your Mortgage Pre-approval Letter Forces You to Face Your Loan Reality
There is something about the reality of a loan Pre-approval that just stops some house hunters in their tracks.
We had one homebuyer compare the fear of attaining his mortgage Pre-approval to his fear of going to the dentist. Although his tooth hurt, he put off going to the dentist because he feared the dentist would diagnose a cavity. Some buyers put off the loan Pre-approval application because they fear the fiscal diagnosis the lender will give them.
Preventive Dentistry and Your Home Loan Pre-Approval
To put it simply, they fear they plan to buy a house that might be beyond their financial means. So they fear a lender may not approve them the desired amount. It doesn’t seem to hit them that getting the loan for a higher amount might cause them more pain in a long run. That’s sort of like avoiding the pain of the dentist. You see it’s not so bad to repair a cavity early, but if you ignore the dentist, you might end up with a root canal. Likewise, if you ignore the warning signs in your Pre-approval days, you could end up in grave financial condition after buying too much house for their financial condition.
If you look at it that way, the process of Pre-approval, while it might be a little painful, is also very protective of you. …Just like preventive dentistry…
House Hunting is a Very Competitive Sport
Whereas it is not a contact sport, house hunting in Florida is highly competitive. You want to be your financial best to the seller when you find that special house. The delay you spend in house hunting, while you get your Pre-approval, can be spent well by fixing unexpected errors on your credit report. Thus, getting pre-approved before you shop for your house also allows buyers to take your offers seriously.
When you find the ultimate perfect house, you won’t have time to get your Pre-approval. The bottom line is that in this competitive sport of house hunting, you must have that magic key. Without that golden ticket of a Pre-Approval Letter, sellers may never see your offer. In the language of a football game, you will be penalized on the play and you will be thrown out of the game.
At Palm State Mortgage, if you are new at this game, we will help you understand the process of Pre-approval. The final truth about mortgage Pre-approval is it is not nearly so complex and mean as you might think it is if you take it one step at a time. Thank you for reading the Palm State Mortgage Blog, and please come back for more news you can use when you are buying a home.