Ask any home buyer, and they’ll tell you there’s nothing like the excitement of the day you discovered that perfect home, the home you and your real estate agent worked so hard for months to find . Remember all the open-houses, the week-ends driving around in and out of homes? When this happens, you as the Buyer must make sure you are prepared to act and move quickly. When presenting your offer, that offer has to stand out in the minds of the Sellers. Even if you’re just starting the "searching" phase of the home buying process, without question it is always smart to have the home loan pre-approval done and ready.

Getting a Home Loan Pre-Approval – The Benefits

In today’s competitive market, rest assured you’re not the only Buyer looking for that good deal – probably a nice home in the best area you can afford. If you want the Seller to take your offer more seriously, you must be pre-approved. This is a simple way to show them that you’re a motivated buyer, one that’s ready to perform and close their escrow fast. If there is more than one offer on the table, there’s a good chance an offer from a pre-approved buyer with better terms will be the one chosen than from a buyer who’s not. After all, why would a Seller waste their time also taking a chance with a Buyer showing little interest.

You’ll find it easier shopping for the a loan with the best terms. With a home loan pre-approval, you’ll have the foundation you need to begin the "comparison shopping" process among the many lenders and home loan programs available. When contemplating the purchase of a home that will cost several hundred thousand dollars, even a half-point increase in fee could make a noticeable impact in the Buyer’s wallet, possibly wiping out any extra funds they may have planned to set aside for home improvements. Besides, knowing upfront what your purchasing power and limitations are as a borrower, along with the corresponding monthly loan payments, this will allow for better planning and possibly even provide an indicator of any adjustments a Buyer will have to consider to their current life-style and expending habits.

Pre-Approval versus Pre-qualify – What’s the Difference?

In a nutshell, a "Pre-Qualification" is a simple calculation process that any lender can do over the phone without having to verify one single qualification category, no income, no credit or if the borrowers actually has the available funds or assets to close escrow. In other words, as a Seller or listing agent, I would not seriously consider an offer unless it comes from a borrower(s) that has been formerly "pre-approved" by a lender.

In closing, a formal "pre-approval" is more substantial. A Borrower will end up with a pre-approval letter stating the actual amount of the home loan, the terms and monthly payment – A "pre-approval" letter is one that holds weight with a Seller. If you are really serious about purchasing a home and getting your offer accepted, a pre-approval is the indispensable very first step.

How Does the Pre-Approval Process Work?

Simple and with no obligation! The first step is to complete a loan application with an experienced lender and provide them with your financial details. An Underwriter will then review the complete file calculating the income, debts, checking the employment and assets verifications, your credit history and also making sure the borrower(s) has the required funds to close available. By reviewing and checking the entire loan submission, a good Underwriter is an indispensable tool in the buying process that will reduce any potential surprises during the escrow closing period.

Make no mistake, a seasoned loan officer is also an indispensable part of this process. He/She will initially request most, if not all the supporting documentation an Underwriter will need minimizing the time needed to properly process your loan file. Please don’t compare your loan pre-approval results to anyone else. Every borrower is unique and each loan submission has a different scenario. Please don’t listen to your plumber, car mechanic or neighbor, they are not financing professionals and unfortunately can provide unfounded, unrealistic expectations of what a borrower can expect. Here is the basic list of documents you may be asked to submit to the lender for review to start the pre-approval process:

  • W-2, 1099s, most recent 2-years 1040 Federal Income Tax Returns
  • Pay-Stubs, most recent 30-days from all employers, proof of any other income you claim in your return
  • Bank Statements, most recent 60-days for both checking and savings (all pages)
  • Rental/Lease Agreements, required for each income property owned
  • Mortgage Statements, Property Tax Bill, Hazard Insurance Policy for each property owned
  • Letters of Explanation for past or present credit issues. A good lender will help you with this
  • Self-Employed Borrowers: You may be asked to document your income in other ways, each industry is a bit different so the income documentation needed will be identified during the application and pre-approval process

By the way, during the initial loan application process, lenders are required to provide borrowers with a detailed "Good Faith Estimate" (GFE). This document discloses not only the lender fees, but also estimates most 3rd Party fees, such as; Escrow, Title, Appraisal, Credit, etc. Upon completion and review of your loan package by the Lender’s Underwriter, the borrower(s) will receive a formal "Pre-Approval Letter". This could be one of the most important documents included in your offer, one that will be expected by the Seller.

A Pre-Approval Letter should contain:

  • The date of issuance
  • Contact information of the lender that generate it
  • Loan Type (Conventional or Government Insured)
  • Down Payment % and any required cash-reserves if applicable
  • Loan Amount
  • Interest Rate (fixed, adjustable, buy-down, etc.)
  • Term of the Loan (15, 20, 30 years)
  • Credit Scores
  • A brief introduction and description written by the loan officer about the borrower(s) pre-approval, qualifiying DTI Ratios (Debt to Income).

More about the "Pre-Approval Letter"

This letter is a non-binding time-sensitive document, a document contingent upon several reviewed qualifying factors, more specifically; your income, available assets, monthly debts and any other financial obligations the borrower(s) have. It also provides the borrowers with a specific "good-faith estimate" usually based and calculated with the borrower’s maximum purchase price, loan amount, interest rate and monthly payment. If a Buyer’s offer was accepted by the Seller and escrow opened, should any of the above mentioned loan qualifying conditions change over the course of the escrow period, the income/debt/funds to close will have to be re-calculated as those will have a positive or negative effect of the calculations made.

Keep in mind that being pre-approved does not guarantee a lender will fund and close your loan – it simply means that if nothing ever changes in the borrower(s) financial picture, the borrower(s) will most likely get the loan. In most cases, when the listing agent presents the seller with several competing offers, the offer that will most likely be accepted will be the one from the borrower(s) that are best prepared, best qualified and can close the Seller’s escrow without fanfare. Don’t be misled, the highest offer is not always the "best offer", a large down payment, good employment and credit all play a very important role in the Seller’s final decision.

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