Like most buyers, you will probably be paying for your home using financing of some sort. Before determining your price range and searching for homes, you need to know if you will be able to get the loan you desire for the amount you require.
If you are buying a home using financing, the first thing you should do is get Pre-Qualified or Pre-Approved.
Pre-Qualification is when a lender evaluates the credit history of a potential borrower to determine an estimated range that the person can afford to borrow. Most lending institutions or mortgage brokers offer free Pre-Qualification. Either in person or over the phone, you will give the lender information about your down payment, assets, debts and income. The lender will then determine an estimated loan amount you could potentially qualify for. The lender will not verify your income and they will not check your credit. A Pre-Qualification is NOT A COMMITMENT to give you a loan and is the bare minimum of what you should do prior to searching for homes.
A Pre-Approval is a tentative commitment to give you a loan in a certain amount. For a Pre-Approval you will give the lender the same types of information as you would for a Pre-Qualification, only this time they will verify all of the information you provide them. The lender will contact your employer to verify your income and check your credit to see about your debts and history. A Pre-Approval is much more desirable to potential sellers as they can rest assured that at a minimum you can qualify to purchase the home.
The Pre-Approval will be conditional. This means that they approve you based on certain criteria. The most typical are:
- An appraisal performed on the property that is satisfactory to the lender
- The lender reviews and is satisfied with the purchase contract
- A valid title review is performed and title insurance placed in effect
- The final approval be given by the lender’s underwriting department
Which should I do?
If serious about finding a home, always go the Pre-Approval route. You will most likely have to pay an application fee, but that small fee goes a long way to strengthen your offer. Many people think financing does not affect the offer and that the only thing to consider is price. This is far from the truth. Real estate financing affects every offer.
Why is this so Important?
If you make an offer on a property that is contingent upon financing, but you do not have a loan Pre-Approval or even Pre-Qualification the seller has no cause to actually believe that you can close. Unless you can prove substantial proof of funds (i.e. having more than 20%, probably closer to 50%), the seller basically has to take your word that you can qualify. They will not know if you have a bankruptcy or a foreclosure on your record which may preclude you from getting a loan. The seller risks turning down a more qualified offer or losing time (and therefore money) opening an escrow with a buyer who cannot close.
Submitting an offer with financing
Send a copy of all documents when submitting your offer with financing including a copy of your Pre-Approval letter, proof of all funds needed to close, and a copy of your credit score.
Now you know the differences between and the importance of Pre-Qualifications and Pre-Approvals, it’s time to make this happen. The next step is Choosing a loan officer.
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