Shopping for a house in the hot market in 2018 without a mortgage pre-approval is kind of like going shopping without your wallet. But you would be surprised how many people do not get a mortgage pre-approval before they get a home loan. It is important to have a pre-approval letter from your lender so that sellers see that you are a serious buyer and can close the deal.
Before you even start looking at homes or get a real estate agent, it is very important to make sure you have the mortgage application all sewn up. There are two major aspects of the mortgage application process to be familiar with:
- Pre-Qualification: This is where you provide the lender with information about your income, job, and debts but the lender does not actually verify the information. This will give you a rough idea what you can get in terms of a mortgage, but it is not guaranteed and has not been evaluated by the lender. Getting pre-qualified for a mortgage is a prudent move.
- Pre-Approval: The pre-approval is where the lender actually verifies your financial documents to determine how much it will lend you.
The pre-approval letter is what you need to show sellers and their agents to show them that you are making a serious offer on the home. The documents that you need to be pre-approved for a mortgage are the same ones that you need to actually be finally approved:
- Pay stubs for the last two months
- Two years of W-2s
- Two years of tax returns
- Two months of bank statements
- Credit report
While the pre-approval letter is a very important aspect of the mortgage process, it is not a final loan commitment from the lender. But there is no question that having a pre-approval letter in hand when you are buying a home will speed the home buying process. There is no reason for a seller to take an offer seriously from someone unless they can prove that they can close the deal. Here are three reasons why this is so important:
The Market Is Competitive
It is not 2010 anymore, and the housing market has mostly recovered since the financial downturn. In 2018, there are more buyers than sellers in many markets across the country, and many sellers have multiple offers on their home. If the seller has the chance to pick among several offers, they will usually choose the one with the best price and the most secure method of financing, whether it is cash or a mortgage loan. A buyer that does not have a pre-approval letter will probably be the last offer to be considered.
No Preapproval Means No Accepted Offer
Even though it is a very important part of the home buying process, there are many buyers who do not get pre-approved, and they make offers on homes. Many realtors say it happens every day, and they are surprised that anyone would try to get a home these days without a pre-approval.
Most experienced real estate agents report they will reject offers from buyers unless they include proof of funds or a preapproval letter. And it has to be a real preapproval where the lender verified credit, income, tax returns and bank statements. Realtors usually call to confirm that this was done. Remember that most real estate agents do not get paid until a deal closes, so obviously they do not want to waste time on a person who cannot actually fund the deal.
You Need to Know What You Can Buy
Some buyers understandably want to just go look at homes because it is fun, and they also are afraid the lender will not approve them. So, they put it off. This is a bad idea. It is important to get pre-approved because you need to understand how much home that you can buy. Why do you want to look at homes that you cannot afford? With a pre-approval, you will know exactly what you can afford to buy and not waste your time.
Your Situation Is Unique
Even if you pay every bill on time and earn about the same as your neighbor who got a $300,000 mortgage, do not assume that you can qualify for the same loan at the same rate. If you have a higher or lower credit score and a different debt to income ratio, the loan that you get could have a very different interest rate.
The bottom line on a mortgage pre-approval is that you should never go shopping for a home loan unless you have one. You will waste less of your time, the seller’s time and you will know exactly what you can afford to buy on your income and credit.