Why not being Pre-Approved is costing you money!
If you are ready to start making offers on homes then you need to be setting yourself up for success by getting a pre-approval. You will hear two terms thrown around, one is pre-qualification and one is pre-approval. Sometimes used interchangeably they are very different things and there is quite a bit of confusion surrounding these terms as the definitions are not always the same depending who you are talking with.
For our purposes we will give each a distinct definition. Be sure to be clear on what each term means to the party you are talking to so there is no confusion.
Pre-qualification: This is a based solely on what you disclosure to a loan office or mortgage broker about your financial state including credit, incomes, assets, liabilities, etc. Nothing is verified and thus is does not really mean anything. At best a pre-qualification can be used to get a broad picture of where you might stand and a generalization of prices you can afford but you can’t use it when a pre-qualification is what is needed.
Pre-approval: A pre-approval is based on documentation provided of income and assets as well as a current credit report. It will include verification of W2’s / paystubs or 1099’s, a credit report, bank statements, and pretty much everything that would be needed to make the loan application and go to underwriting. The only thing left after this is a contract to purchase and an appraisal. This is what you need to be sure what you can buy and more importantly this is what you need to prove to a seller that you can buy!
NOTE: A lender will not necessarily ask for this level of documentation unless you make it clear what you are looking for. To get to this point a lender will have made a significant investment in time in you and they may ask for a fee to get the process started. This is not unreasonable.
Along those lines, you should be shopping for your lender BEFORE the house and note that there will NOT be a significant difference in pricing. Most fees are regulated so you will be looking for customer service and convenience. Trust me on this one, go with a local, brick and mortar lender, not a virtual online lender. There are no advantages and only heartache and stress to be found online.
There was a time when pre-approval was not emphasized as much and there was an assumption that most anyone could get a loan. Now it quite the opposite, it is assumed that most people can not get a mortgage, or at least not the one they thought they could. Even the best qualified candidate will experience a protracted time consuming process at best.
Meaning, if you have not already started the process before making the offer you likely will not be able to make the closing date.
Why pre-approvals matter to you
- Suitcase full of money: There is nothing better for negotiation then cash dollars, certified funds, etc., sitting in the bank and if you don’t have that the next best thing is a loan approval. It’s a lot easier to be taken seriously when the seller is confident you can buy. If you do not have a pre-approval the offer is theoretical at best. Consider these two statements:
- I may be able to buy your house if you will accept these terms. Would you please consider them and if we can agree, then I will see if I can actually buy.
- I will buy your house for these terms. I am pre-approved for a loan with this local well-known lender, they have verified my employment, checked my credit and confirmed I have all the funds for the down payment.
- You can move fast: What if that “perfect” home comes on the market, priced right and you know its “the one”. The house is listed with a true professional agent and the seller has stipulated all offers must have a pre-approval and permission to contact the lender to confirm (that’s what I do for my sellers). You may be the best qualified buyer on the planet and could afford something 3 times the cost but it’s Friday, 5:15pm, a 3 day holiday weekend ,etc. and you do not have a pre-qualification. Do you think the house will be there in a few days? Lets say it is, how was your weekend? How did you sleep? Ok, a bit dramatic but you get the idea. Seller’s today are asking two questions, are you serious and PROVE IT!
- Get the best representation: If you are a well documented eligible buyer you will be able to attract the best representation including top lenders and real estate agents. Chances are that a realtor that does not require a buyer to be pre-approved will not be one of the more successful ones. What kind of business do they run if they have time to work with clients that may not be able to buy? Are they representing your best interests if they don’t set you up for success or let you waste your time? Have they done their job if you find a great house but lose it because they did not advise you on how the process works?
We have “won” contracts for our clients with lower prices than other offers because our buyer appeared stronger financially. This due diligence on the buyer’s part regarding financing showed them as a stronger, more serious buyer. More transactions are falling apart after a contract is in place because of financing. Doing your financial homework upfront puts you in the best position to get your price and terms.
If you are not getting this advice you are not being counseled by a professional. Be sure you are working with someone that keeps up with the market and the business side of real estate, this is where they earn their keep. I will let you in on a little secret, we all have access to the EXACT same information on houses for sale, all of us. The difference is how well we know the business part and even more important the psychology of the transaction.
Regards, Tom Schroth
Tom Schroth, is a career agent with over 20 years helping people buy and sell their homes and has owned over a dozen homes personally including rentals, investment properties, flips and rehabs. He practices what he preaches by making real estate not just a place you call home but a wealth building investment. Tom runs the Schroth Realty Group, schrothrealtygroup.com, a team of professionals dedicated to providing real estate buyers and sellers in the metro Atlanta area an exceptional experience. His resume included hundreds of real estate transactions, a broker’s license in both Georgia and Ohio, founding a real estate company, and managing and office of one of the largest real estate networks in Atlanta. Tom Schroth also runs Whiteboard Group, a business development consultancy and coaches business owners and individuals to help them get clear on their goals and take steps to achieve them and “Perform at Their Highest Level” see: wboardgroup.com and Tom’s other blog, “Business Yoda” businessyoda.com.
Do you have house to sell? Are looking to purchase real estate? Contact Tom’s team at 888-724-7864