Question: I’m thinking about starting to look for a house. My friends tell me I should get pre-qualified for a mortgage first and the 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 homebuyers 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 mortgage company then checks your credit, verifies your income and financial accounts and puts together a complete loan application file with supporting documentation.
Your loan file is then submitted to an underwriter for approval. Most mortgage companies now use automated computerized underwriting systems that can give you a loan approval within minutes. However, your loan file must eventually be reviewed and approved by a human underwriter before the money is actually released. The underwriter looks over the file 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 history – all you need now 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 homebuyers 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.
In some cases, being pre-approved can actually make the difference between buying the house of your dreams or losing out to the competition. Homes in desirable areas that are properly priced are selling fairly quickly these days. In some cases, sellers are receiving multiple offers on homes that have just hit the market. The homebuyers who are pre-approved for a mortgage have an advantage over the buyers who have not yet taken that step.
If you are shopping for a home, fill out a loan application today 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, Everett, WA 98206. Fax questions to Tytler at 425-339-3435 or e-mail him at economy@heraldnet.com.
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