Are you curious about why people keep telling you to get a pre-approval before you start house shopping? You see it everywhere and, admittedly, lenders and Realtors® are fairly pushy about it. There is absolutely a good reason for this.
The best way to focus your home shopping efforts is to know your price range before you start touring homes. You will be able to tell your Realtor ® the features you are looking for and your maximum price. This will allow him or her to search within your pre-defined parameters. Looking at houses with 2 bedrooms when you really need 3 or more is not worth your time. You wouldn’t bother with it. The exact same thing applies to looking at houses that fall outside of your price range. You can figure out by yourself how many bedrooms you need. You will need a little help from a professional to figure out what your price range is and we are more than happy to give you that professional help.
Ok, so how do you figure out how much house to shop for? That’s easy! Let’s start with some terms you might have heard relating to figuring out how much house you should be shopping for. We are going to cover the two most common ones. Those are:
Pre-Qualification: Often referred to as a Pre-Qual, this is a process where a prospective borrower speaks with a Loan Originator and provides verbal information about their overall financial picture. This will include things like income, assets and existing debt. During the Pre-Qual process, none of the provided information is verified with any type of documentation and a credit report is not pulled. This is the lowest level of analysis performed to attempt to determine how much money you can comfortably borrow.
The downside to this level of qualification is that there is so much more to consider when we review your financial situation and try to match that with your home buying goals. We cannot tell, at this level, what kind of interest rate would be available. There are also other factors to be considered to determine true loan eligibility that just don’t get looked at during Pre-Qual.
Borrowers that depend on this type of measure are at risk of finding out later that they qualify for less, want a lower payment than is available to them because of interest rate, may run into a seller who will not accept a Pre-Qual letter because their Realtor® is experienced enough to advise against accepting a Pre-Qual Letter or once the lender starts verifying the borrower’s information realizes that the application should be denied. The risk of wasting your time and falling in love with a house that is out of reach is a little too high with this type of low-level analysis.
Pre-Approval: This one is the most requested type of analysis by savvy borrowers and sellers. To obtain a Pre-Approval letter, a prospective borrower needs to fill out a full mortgage application and provide the lender with any requested documentation. The lender will pull your credit and review the application and documentation to get a clear picture of your personal credit profile.
The greater amount of information provided for this level of review, allows the lender to do a more thorough analysis and will help them narrow down a more accurate amount of money that you will be able to borrower to meet your payment or overall financial goals. In most cases, they can even provide you with a range of interest rates you might be able to expect.
Sellers prefer to receive a Pre-Approval letter over the pre-qual because this reduces the risk, for them, that you will be unable to obtain your financing. In a competitive market, a seller might receive two similar offers where one has a Pre-Qual and the other has a Pre-Approval. Their listing agent will advise them to take the offer with the Pre-Approval over the Pre-Qual. The bigger benefit to you in this is that it helps you and your Realtor® define the type and price range for properties that you should be viewing. This leads to a more focused home shopping experience.
Both of the above will provide you with a letter to go home shopping with. The Pre-Approval puts you in a stronger negotiating position when you are ready to submit an offer on a house.
Let us help you and your Realtor® bring your home search into a sharp focus while providing you with a stronger negotiating position. We are here to help and look forward to hearing from you.