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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, October 19, 2008 Buyers' 1st step: mortgage approval By Steve Tytler Question: I'm thinking about starting to look for a house. My friends tell me I should get "pre-qualified" for a mortgage first. My real estate agent says I should get "pre-approved" for a mortgage first. Is there a difference, and is it really important to get the mortgage part taken care of first, before you make an offer to buy a home? N.J., Bothell Answer: Many home buyers are confused by the terms "pre-qualification" and "pre-approval." A "pre-qualification" is simply a quick conversation with a mortgage loan officer, usually over the telephone, to determine how large a mortgage you can afford based on your current income and debt situation. The loan officer takes the numbers you give him or her and runs them through a calculator to come up with your maximum loan amount based on the current interest rates for various loan programs. That gives you a realistic idea of how much home you can afford. A "pre-qualification" is just the first step in the mortgage application process. It is not a guarantee that you will get the loan, it just means that you can qualify for a certain loan amount if your income and credit information checks out as stated. However, that is not always the case. You may have overestimated your actual income, or more commonly, you may have underestimated your monthly debt payments or your credit rating may not be as good as you thought. The only way to know for sure that you will get the loan amount that you want is to get "pre-approved" for a mortgage. That means filling out the loan application form and providing all the required documentation to support your stated income and financial assets, such as paycheck stubs, bank account statements and investment statements. The most important factor in qualifying for a mortgage is your credit score, commonly called a "FICO score." The only way to truly know what your credit score is for mortgage purposes is to have your credit report pulled by a bank or mortgage company. The credit scores that you get from those "free credit report" services are not the same because they use a different computer algorithm to score your credit. After pulling your credit report, mortgage companies run your loan application through a computerized automated underwriting system to get a loan approval (or decline) based on your income, credit and financial assets stated on your loan application. After receiving an automated loan approval -- which can often be accomplished the same day that you fill out your loan application -- the mortgage company gathers the paycheck stubs and other documents required by the automated loan approval findings. Your complete loan file is then reviewed and approved by a human underwriter to make sure it meets the lender's guidelines for the loan program for which you are applying. If everything is in order, you will receive a "credit approval" on the loan. That means you have a written loan commitment based on your income and credit and all you need is a house to go with it. In most cases, the automated underwriting findings are sufficient to get you a "pre-approval letter" from a mortgage company or bank that you can use when making an offer on a home. Home sellers and real estate agents love to work with home buyers who have been pre-approved for a mortgage. They will take you more seriously when you make an offer, and you will have more bargaining power because you can guarantee that your deal will close. It's the next best thing to being an all-cash buyer. Home sales sometimes "flip" when the buyers fail to qualify for a loan and the seller is forced to put the house back on the market. By relieving the sellers of that anxiety in advance, you may be able to drive a tougher bargain on the purchase price because the sellers know you can close quickly. So if you are shopping for a home, fill out a loan application as soon as possible and get pre-approved. I know that filling out forms isn't a lot of fun, but it is much easier to complete the loan application process while you are calm and relaxed, rather than stressing out over a purchase offer that you just made. There is plenty of pressure involved in negotiating the purchase of a home without adding the stress of applying for a mortgage at the same time. Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206, or e-mail him at economy@heraldnet.com. READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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