For those who are thinking about taking the plunge and start shopping for a new place to live, it’s probably a very good time to do so. Interest rates have been reluctant to stage any sharp increase over the past year or so but they have moved up from their historic lows. And any economic forecaster will tell you the likelihood of the Federal Reserve actually lowering rates anytime soon is almost nil. In fact, interest rates are expected to rise over the long term as the economy continues to gradually improve rather than fall. That means if you’re seriously thinking of buying a home it’s almost a given that waiting until sometime next year to buy, rates will be higher which will impact how much you can qualify for.
Something else that needs to be seriously considered is whether or not you need to speak with a lender before you go shopping. In short, the answer is “definitely” but it may not be for the reasons you think. Before you get too far into the home buying process it’s time to pick up the phone and speak with your loan officer. With just a short conversation you can get an idea on where interest rates are and review your loan choices along with a qualifying loan amount. That conversation is called a prequalification. You do however need to move that prequalification up to the next stage- a preapproval. The best piece of advice you can get prior to shopping for homes is to have your preapproval letter in your hand.
A preapproval means the important aspects of your loan application have been reviewed and verified and all you need to do next is find a place to buy. Beyond completing the loan application you will also give your loan officer copies of your recent paycheck stubs and W2 forms as well as bank statements showing you have enough funds available for a down payment and closing costs. Your credit report is also pulled and reviewed. Once this has been completed, your preapproval can be issued. Here’s why this is so important.
When you finally find your perfect home and put together an offer, the sellers will want to see a preapproval letter. If all you have is a prequalification letter instead of a preapproval letter, sellers will know your credit report hasn’t been reviewed and your income and employment documented. Having a preapproval letter in your hand shows the sellers you’re serious about buying a home and not just attending open houses to see what’s out there and for how much. Your preapproval letter won’t tell the sellers how much you can qualify for, that’s for you and your lender to know, but it will tell the sellers your credit, income and assets have been verified and the missing piece is a property address.
Think about that for a moment. Let’s say there are three competing offers for the same property. You make an offer just below the list price while the other two offers are a bit higher than yours. Not by a lot, but higher nonetheless. Yet the other two offers don’t have an accompanying preapproval letter. When sellers accept a contract the home goes into a “pending” status. When that happens fewer buyers will visit the property because the home is essentially taken off the market and just waiting for the closing to happen. Sellers don’t want to tie up their home with a pending contract for two or three weeks only to find out their buyers can’t qualify. Further, the sellers more than likely need to sell their home in order to close on their next one.
Real estate agents today know the importance of a preapproval letter. Buyers can contact a real estate agent over the phone or with an email saying they’re ready to buy a home and need someone to help find the perfect property. Of course, all agents will jump at the opportunity to represent the buyers. That’s how they get paid, right? But after a conversation, the agent will want to know if the buyers have spoken with a lender. If not, the agent won’t be all that excited to start to work if the agent isn’t convinced you can qualify. Without a preapproval letter, the agent will first ask you go get one.
The other agent that wants to see that same letter is the seller’s real estate agent. If the sellers won’t demand to see a preapproval letter you can bet their real estate agent will. The sooner the agent sells the home the sooner they get paid. And real estate agents know the difference between a prequalification and a preapproval letter.
Finally, it’s you that gets the benefit of a preapproval. There is no wondering whether or not your loan will close. You know in advance if the offer you make is one that fits your budget. Your credit report has been reviewed and approved. There is a completely different approach when shopping for a home knowing the financing is already sewn up and all you need is a property. The most important reason for a preapproval letter is you.
The author, Matt Herbolich, MBA, JD, LLM NMLS #1649154, is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Contact Matt Herbolich, MBA, JD, LLM for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email firstname.lastname@example.org.