House hunting is a time-consuming affair. Buyers can simplify the search for a first house by getting their financial house in order first.
Home buyers have a lot on their "to do" list from day one. From finding a Realtor and touring homes to making an offer and closing the deal, it's a journey, not a sprint. Before falling in love with nice neighborhoods, new siding, bay windows, spacious kitchens, extra bedrooms or rooms with a view ... the first order of business is to think about a home loan.
Prequalification or, better still, preapproval, for a home mortgage is best done early in the house-hunting process. This serves a five-fold purpose:
- It gives home buyers a better idea of the price range that they can afford.
- It saves house hunting time because home buyers can now bypass homes that are outside the established price range.
- It gives sellers peace of mind, too. Many homebuyers bid on the home of their dreams only to learn that it's someone else's dream home, too. Evidence of financial ability to pay can make the difference between an offer that's accepted versus one that's rejected.
- It gives hard-working Realtors peace of mind knowing that they're working with a client who is serious about buying.
- Once an offer is accepted, the application process is streamlined and there is one less hurdle between the house hunt and the house-warming celebration!
A Prequalification Letter Gives Home Buyers a Head Start
A prequalification letter is a good first-step. Most lenders will do this free of charge. This letter does not guarantee financing or commit buyers to working with a particular lender. However, it does verify that the buyer is in good financial standing and can afford a loan within the established price range.
Mortgage brokers or home lenders can get the job done quickly with a brief meeting and some basic information and documents from the home buyer. Then, they'll run the numbers and determine whether a buyer's dream home is financially feasible.
Prospective financers will look at home buyers' credit history and other information. They'll consider several factors, such as length of employment, established and projected income, credit score, outstanding debts, price range of desired properties, savings accounts and other assets, and how much is available for the estimated down payment amount.
The lender will then provide a pre-qualification letter. With this validating document in hand, the home buyers and any offers made, will be taken more seriously.
A Preapproval Letter Is Even Better
Preapproval goes beyond prequalification, which simply means that buyers are financially qualified, but not guaranteed by that lender. Preapproval, on the other hand, is the home lender's seal of approval that the lender will provide a loan if a seller accepts a buyer's offer. However, the preapproval letter is still contingent upon a clear title-search, appraisal data and other finishing-touch details.
If buyers want a competitive edge, a mortgage preapproval letter assures the seller that a buyer means business. Sellers will appreciate knowing that the deal won't fall through later if interested buyers can't secure financing.
Preapproval requires more extensive documentation. Lenders will request specific documents, such as W-2 forms or bank statements, from the home buyers. There are typically fees associated with verifying the borrower's credit history, as well as checking and processing other information.
This includes checking employment and other sources of income, savings and other assets, as well as credit card debt and other financial obligations, such as child support or outstanding loans.
Be upfront with lenders about credit blemishes or potential pitfalls. A buyer who skipped the last payment on that big-screen TV, is recently unemployed or is dodging a bill collector will encounter challenging, but not insurmountable problems. It's better to clear the air early, since the numbers don't lie. If there are problems, there are still solutions. It just may require a little more creativity, time and patience.
Once the paperwork is done, buyers will receive a letter of preapproval. This document indicates that the lender is committed to lending buyers a specified amount of money if a seller accepts their offer to buy. That's great news for everyone involved.
Prequalified or Preapproved ... it's All Good
Any advance work to secure and document financing is a valuable house hunting and home buying tool. Whether you're prequalified or preapproved, you're well prepared for a wise property purchase!
Join the Conversation