I am in the process of buying my first home. I am very excited about the process and I am looking forward to calling the home my own. My lender has given me a letter stating that I qualify for a home loan. My agent says that it is not a loan approval letter. I am not sure what it is, but it sounds like I qualify. Can you please help me understand what I am missing?
Thank you for your question. When you want to buy a home, it is helpful to understand the difference between “pre-approval” and “pre-qualification” for a loan. In fact, there are many Realtors who do not understand the difference. A good Realtor will demand that you obtain “pre-approval” before you go out looking for a house to purchase because she then knows she can vouch for her buyers’ ability to afford the homes she is showing them.
Pre-qualification doesn’t offer the seller or seller’s agent any solid assurance that your eligibility for the loan has been verified and approved. You can obtain pre-qualification by simply talking to a lender on the telephone or entering a little information online. When you make a purchase offer on a home with only a pre-qualification, you are asking the seller to take his house off the market while he waits several weeks to see if you qualify for the loan. This situation is called a loan contingency. You get to buy the house if the loan comes through. The only benefit to pre-qualification is that it is better than nothing and does satisfy some Realtors to begin the search.
A loan pre-approval must be obtained anyway, so sooner is better than later. Truly, obtaining loan pre-approval before you begin your home search is the best way to go. Loan pre-approval from the lender is the full approval. Basically, pre-approval is like having a check in your hand from your lender for you to purchase the home. Pre-approval means that the lender has your signed loan application and has confirmed and approved your income and work history, the amount of cash you have for the down payment, the source of your down payment, your outstanding credit cards, your credit history, the type of loan you selected, the interest rate on the loan, any other real property loans, any car loans, your assets and any other debts you have, and reviewed your tax return.
Loan pre-approval is excellent for negotiating strategies. In today’s fast- paced real estate market, it is not uncommon for a home to receive more than one offer on a property at the same time. If you are the buyer with a pre-approval in hand, your purchase offer is more attractive to the seller, as with your offer there would be no loan contingency for the seller to worry about.
Also, a loan pre-ap-proval in hand means a quicker sale. Often the seller will accept a lower offer because the sale is expedited. With a quick sale, the seller can avoid paying four to 11 weeks of interest on his mortgage. Being pre-approved also offers you the benefit of knowing what you can really afford to buy. With pre-approval, you know exactly what you can afford and you won’t disappoint yourself by looking at houses out of your price range.
Any lending institution will happily provide you with its pre-approval services. The process of obtaining pre-approval takes approximately three to five weeks. After
you have obtained pre-approval and you have found a house you want to buy, your lender must approve the purchase price negotiated between seller and buyer. Some buyers are so excited about finding their dream homes, they don’t like to wait for pre-approval before beginning their search, but this approach may actually obstruct them from being able to buy a home quickly.
When you are applying to a lending institution for pre-approval in a market where loan rates are rising, make sure that your lender locks in your loan rates, points and loan fees. Most lenders do not volunteer to do this. You need to specifically request it. Be wise and don’t put the horse before the cart. Channel all your enthusiasm for finding your home sweet home into preparing to be able to purchase it when you do find it by obtaining your pre-approval from the lending institution of your choice.
Kari McCoy owns the Kari McCoy Group, Residential Real Estate, at Lyon Real Estate. Contact her at (916) 941-9540 or email@example.com