There are certain terms we real estate people love to throw around. Said terms are so commonplace with us, that we often incorrectly assume that our clients know exactly what we are talking about. However, there is one term in particular that is of utmost importance these days, so we thought we needed to make sure that all of us are on the same page with the term “pre-approved.”
With the market having such a low inventory of homes, getting pre-approved is more important than ever. In fact, it is so important that a lot of times, “Are you pre-approved?” will be the first question your real estate agent asks you before they even get into the nitty gritty of location, number of bedrooms, and all the other things on your wishlist. Because of the tight competition among buyers, a pre-approval can be the difference between getting a contract accepted or not.
Today, we are going to clear-up the how, what, when, where, why (not necessarily in that order) of getting a pre-approved.
What does pre-approved mean? Pre-approval is validation. Simply put, when a prospective home buyer gets pre-approved, it means that they have supplied specific information to a financial institution, which in turn has determined the viability of the buyer to take out a home loan up to a certain amount of money. The financial institutions will issue a dated pre-approval letter that is usually valid between 30-90 days. To be pre-approved is to be officially OK’d for getting serious about shopping for homes.
Why should I do it? There are so many reasons for buyers to get pre-approved. Today’s market is very tight and competitive. When looking at offers from buyers, sellers and their agents are going to take bids more seriously from pre-approved buyers versus buyers who have not yet gotten their financing lined up. Pre-approval puts buyers in a stronger position to get their offer accepted.
Sellers want to know that the people to whom they are promising to sell their house will have no problem securing financing. Here is why: let’s say a non-approved buyer puts an offer on a house and the seller’s accept it. The house is then off the market. The mortgage process then begins, but it could be several days (or weeks) before the bank determines whether the buyer is okay to buy the house for that amount of money. So now the buyer is disappointed because they couldn’t get their dream house afterall, and the seller is disappointed because they lost days on the market…days that other buyers might have gone elsewhere to purchase another house. The sellers are back to square one, which means they might have to wait to put an offer on their next house. Lack of pre-approval can really start a domino effect that cheats more than 2 families out of achieving their real estate dreams.
Pre-approval is also powerful education for buyers: becoming pre-approved ensures that buyers are looking for homes that fall within their budget. Nothing is worse than falling in love with a $300,000 home, only to find out that you are only able to afford a $200,000 home. Pre-approval helps keep expectations realistic.
Additionally, entering into a relationship with a real estate agent will be much more transparent and trustworthy if you arrive with a pre-approval letter in hand. It shows the agent that you are serious about your home search and you aren’t just looking at houses for fun.
When do I get pre-approved? The best time to get pre-approved is before you start looking at homes. If you haven’t talked to a licensed mortgage broker before you call your real estate agent, your agent is likely to suggest that you start the pre-approval process right away before you step foot in a prospective home. This pre-approval process will lay the groundwork for the loan application process after you have a contract on a house, so it is time well spent. Also, as stated above, getting a pre-approval before you start searching for homes provides you with the knowledge of how much house you can afford, so that you begin your search with realistic expectations.
How do I get pre-approved? Who do I talk to? Where do I go? You can talk to a licensed lender at any financial institution, bank, credit union, or mortgage company that has home loan products to get pre-approved. The easiest place to start your pre-approval process is the bank you have an established relationship with, where you normally conduct your personal business. The other option is to ask your agent whom he/she/they would recommend, because REALTORS® usually have close business relationships with a variety of lenders and sometimes know which ones offer products or services that might be a good fit for your specific situation. Relationships help all of us navigate this world, and that includes your relationship with your agent and lender.
However, just because you get pre-approved at one financial institution does not mean you have to get the loan from that place. Once you have a signed purchase agreement, you can easily shop around for the best interest rate and terms and services.
Mostly likely, the lender will pull your credit score during the pre-approval process, but you will also need to gather some materials in order to complete the initial application. While your lender will tell you exactly what you will need, generally, it is a good idea to have the following materials within close reach, for each person who will be on the loan:
- Driver’s license or other state issued ID
- Last two years of tax returns and employer W2s
- Paystubs from the last 30 days
- Two consecutive months of bank statement
How long does it take? Once you have applied for pre-approval, it will take between 1-3 days for the lender to make a determination of how much house you can afford. The lender will then issue a letter to you stating your status and amount of the pre-approval. It is good to submit a copy of this letter to your agent to keep on hand because sometimes, sellers will ask to see a copy of the letter.
How long is it good for? The preapproval letter is not open-ended and is only valid for 30-90 days. This means that time is of the essence for getting serious about your home search. If you really cannot find your home within this time frame, you will probably need to have another conversation with the lender. They will verify if there have been any changes to your income, credit history, or general financial situation, as well as check the average mortgage rates, and they will issue a new letter with a new expiration date.
In Summary
As the spring housing market draws nearer everyday, we are hoping that inventory will radically increase; but generally, as the days become longer and the sun warms things up, more buyers also enter the game. Chances are the local housing market here in Southwest Indiana will remain extremely competitive in the months to come.
As a buyer, you need to position yourself to be ready to make a strong, attractive offer right on day one of your search. Before you even call an F.C. Tucker Emge REALTOR®, the smartest thing to do is to get pre-approved. Simply call a licenced mortgage broker, either where you do your regular banking or at another local, brick and mortar institution, and they will eagerly walk you through the process.
To be pre-approved means that a financial institution has given you the preliminary “thumbs up” for borrowing money from them to purchase a home.
Among the many benefits of getting pre-approved is that it helps you set reasonable expectations as you start to look at homes. Then, it puts you in a strong position to get your offer accepted.
We know houses and we know lenders, but lenders know mortgages. If you are unsure about who to turn to for pre-approval, do call an agent for a recommendation. F.C.Tucker Emge real estate agents all pride themselves with having healthy relationships with trustworthy local lenders who can answer all of your questions about pre-approval or anything else mortgage related.
For additional information on pre-approval, call your lender today, or you can check out these articles first:
