One of the first steps in your homebuying journey is getting pre-approved. To understand why it’s such an important step, you need to understand what pre-approval is and what it does for you. Business Insider explains:
“In a preapproval, the lender tells you which types of loans you may be eligible to take out, how much you may be approved to borrow, and what your rate could be.”
Basically, pre-approval gives you critical information about the homebuying process that’ll help you understand your options and what you may be able to borrow.
How does it work? As part of the pre-approval process, a lender will look at your finances to determine what they’d be willing to loan you. From there, your lender will give you a pre-approval letter to help you understand how much money you can borrow. That can make it easier when you set out to search for homes because you’ll know your overall numbers. And with higher mortgage rates impacting affordability for many buyers today, a solid understanding of your numbers is even more important.
Pre-Approval Helps Show You’re a Serious Buyer
Another added benefit is pre-approval can help a seller feel more confident in your offer because it shows you’re serious about buying their house. A recent article from Forbes notes:
“From the seller’s perspective, a preapproval [sic] letter from a reputable local lender often can make the difference between accepting and rejecting an offer.”
This goes to show, even though you may not face the intense bidding wars you saw if you tried to buy during the pandemic, pre-approval is still an important part of making a strong offer. In fact, Christy Bieber, Personal Finance Writer at The Motley Fool explains it may be the most important part of making an offer:
“Pre-approval maximizes the chances you’ll be able to actually close the deal – and sellers want to see that.
The fact that a pre-approval gives you a better chance of getting your offer accepted is undoubtedly the most important reason to complete this step…”
Get a Pre-Approval
Getting pre-approved is an important first step towards buying a home. It lets you know what you can borrow and shows sellers you’re serious about purchasing their home. Connect with a local real estate agent and a trusted lender so you have the tools you need to purchase a home in today’s market.
Credit Healthy – Credit Scores, Lenders, and Pre-Approval Letters
Agent Joyce Marie Jackson returns for another installment in her “Credit Healthy” series with information about the all important pre-approval. A very important step in the process of buying a home, a lender’s pre-approval relies on several factors, including your credit score. Let’s hear from Joyce…
Too often, people are more interested in their credit score than what’s in their credit report. The truth is a person can have a good credit score and still not qualify for a loan or credit card for a number of reasons. This concern opens the door for one of the most important questions a Realtor will ask a potential buyer, “are you pre-approved?” This important question may cause a buyer to stop communicating with the Realtor…for some misunderstood reason, for some buyers, the question seems offensive and invasive.
If it was asked incorrectly, I understand. However, it is one of the most necessary questions a Realtor will ask a buyer in addition to asking if you are already signed with another Realtor. Too often a person pulls their credit history and gets their credit scores through a number of sources for free or a small fee. The scores that come with this type of report may show credit scores at a higher number than what a lender will pull. It is frustrating trying to understand why the scores are so different. More to the point, why are the Lender scores usually much lower than what the buyer can pull independently?
According to findings by the Credit Sesame app, there are a few reasons why. Most lenders will pull the FICO (Fair Isaac Corporation) score and there are several types of FICO scores: FICO Auto Score (250-900), FICO Bank Card Score (250-900), and FICO Mortgage Score (300-850). Other types of FICO scores vary: FICO 5, FICO 2, FICO 4, FICO 8, and FICO 9 all exist. They are similar and different. In addition, all lenders may not use the same FICO score algorithm. The FICO score will consider more of your debt than other types of credit scoring systems.
Once a lender receives your three credit scores, lenders have a formula that they use to determine your final score. One example could be, from three credit bureau, your scores were 730, 685, and 710. The highest and lowest score is knocked out. The middle score will stand as the winning number, 710.
With other types of scoring systems such as Vantage, all debt may not be included therefore resulting in a higher credit score.
These are just a few reasons why your free credit scores may be higher than the one the lender will pull. So, what should you do? You can still get the credit report and use it to clean up anything that is not yours or should not be there. Once you’ve done the credit clean up, then allow a lender to pull your report and provided you with the scores that will be used to qualify you to purchase your home. The Lender will go over the report with you and provide tips if needed to help boost your score. After the lender receives requested documentation, verifies employment, and the credit score is right, you will receive a pre-approval letter naming the amount you can purchase at. Sounds like a plan. So, the next time a Realtor asks if you are pre-approved, don’t let that question scare or stop you from moving forward. Knowing the answer to that question will open the door for a successful home buying adventure.
image courtesy of karmadude
What good is a pre-approval…and why are agents always trying to make me get one?
If you’ve been in contact with a real estate agent lately (or even spent some time on a real estate website), you’ve probably seen a lot of talk about “getting pre-approved” or “you need a pre-approval.” A pre-approval is vital in today’s market (and in any market in my opinion) to finding the home you want, the home you can afford, and the home you can get under contract without losing it to someone else.
“Pre-approval” is a letter from your lender stating you are pre-approved to buy a home for a certain price. Does it guarantee you’ll get the loan? Not necessarily, but it does improve your chances.
What’s the process?
Pre-approval begins with you speaking to a lender. They will collect information about you, your current living situation (buying or renting), job history, your social security number, and run a credit check to get your FICO score (also known as your credit score). Lenders vary on how they go about the process, but the basics remain the same. Some lenders will do it over the phone while some want to sit down with you and require you to bring certain paperwork (pay stubs, W2s, bank statements, etc.) along with you.
By checking the basics of your employment, financial statements, and credit score, the lender begins to get a picture of who you are as a credit holding member of society. Do you have constant late payments or are you always on time? Have you been employed steadily for a week or 10 years? Do you have any tax liens or judgements against you? Have you ever filed bankruptcy with the help of ch 7 bankruptcy lawyers? Do you have a large bank account showing a pattern of savings or is your account always teetering on being closed for insufficient funds. Is your outgoing debt higher than your income or are you debt free? These are just some of the things lenders are looking for when you seek pre-approval.
Most lenders use various computer programs to get your pre-approval. They plug in the numbers and the software runs it through its algorithms to determine if you’re pre-approved. There are times when the software comes back on the edge of one decision or another and then the lender can step in and get the loan manually pre-approved.
In the end, you’ll wind up with a thumbs up or thumbs down and a dollar amount of the loan the lender feels you’re qualified for. A good lender will also sit down with you at this point and discuss your goals and options in buying a home. You might be approved for a $200,000 loan, but because you’re trying to save some money for the future, they might recommend you only buy up to $150,000 to keep your payments at a level you can afford (and have money left over to put away).
So why do real estate agents care about what I’m pre-approved for?
We as agents do care about the pre-approval – very much so. It is one of the most important steps in our first few meetings with a client. The pre-approval process provides us with several things, some of which are crucial to us doing our jobs and providing you with the best experience.
First, the pre-approval process gets the ball rolling. Many buyers like to take their time perusing listings on the internet, going to open houses, or “just looking.” The pre-approval process is a defining moment in the search process. It gets the buyer into action mode and sets the agent’s sights on the next steps.
Second, it allows us to pinpoint what you can spend as we look for what you’re looking for. You tell us you want a 5 bedroom house in a certain community, but we now know that a 5 bedroom in that community is out of your range – we can help you make firm, educated decisions. You might have to settle for the 4 bedroom in that community, but we know of a nearby neighborhood that has a 5 bedroom that fits your price range. We hate to see a client falling in love with a house that we later find out they can’t afford. I certainly don’t like to be the bearer of bad news.
Third, I don’t know any listing agent (or banks or HUD) that will take an offer without a copy of a pre-approval letter. Without one, there is no sense in submitting an offer, because it will just get turned down. The seller wants to know that when you say “I’d like to buy your house,” you can afford it and they won’t be stuck scrambling to find another buyer when you get turned down for a loan.
And what benefits does it have for me?
Most lenders will lock in your rate for 90 days, allowing you to get pre-approved now and take advantage of today’s rate instead of the rate three months from now. Now of course, interest rates can be volatile and change on a whim. Because of this many lenders offer what is called a “float down.” This allows you to lock in today and move your interest rate to a lower one if it becomes available during the period between locking in your rate and the actual purchase of your home. Typically, a lender will only allow you to do this once, so you must choose wisely.
It gives you a road to recovery if there are any problems. Many people have credit problems. Its not uncommon during the pre-approval process to uncover a debt that has long since been forgotten, mistakes on your credit report, or even someone else’s credit history appearing on your report (my dad and my brother had some cross reported items as they share the same name). By getting approved now, there will be no surprises later. Many people just need some simple adjustments to boost their credit score (allowing them to buy more, at a better rate, or push them over the edge towards being approved).
So I have a pre-approval – that means the “money’s in the bank”, right?
No. Although a pre-approval is about as close to getting a loan as you can get (without being handed a big pile of cash), it is not a guarantee. Your loan is still conditional upon you meeting the requirements of the loan. This is a great time to not apply for new credit, charge anything to your credit card, go buy a new car – anything that will add debt to your credit report is a bad thing right now. Just hold tight and wait to get the keys to your new home before buying all that new furniture or a shiny new red convertible. During the process of buying your new home, the lender will re-check your credit towards the end of the process as well, so you want to look as good to them on paper as you did when you first got your pre-approval.
The lender will probably ask for a lot of paperwork during the loan’s actual approval and getting it to them in a timely fashion will help alleviate any unforeseen problems. Underwriters (a whole other blog post) are notorious for asking for additional information during the approval process and it can seem frustrating, but just remember – they’re taking a risk by giving you a large sum of money, so they have to cover all their bases too.
Pre-Qualification vs. Pre-approval.
Pre-qualification is similar to pre-approval, except it relies on you giving the lender the facts about your income, debt, employment, etc. without any real verification. It seems to be going the way of the dinosaur and is pretty useless these days. It used to be you could make an offer on a house with one, but anymore no one wants them. If given the choice (which is rare), go for pre-approval as it is a much stronger statement of your financial situation.
One final note…
When a lender pre-approves you, have them send a copy to your real estate agent for their files. This will make an offer a quick and easy process and you won’t have to go find the letter when you need it most. Of course, when making an offer, your agent will try to contact the lender and get a pre-approval letter written so that it reflects the offer price. There is no need to show your hand when making an offer and suggest to the seller that you’re offering this much, but could afford and are pre-approved for much more.
photo courtesy of Toolstotal