When And Why Should You Get Pre-Approved For A Mortgage?

Should Get Pre-Approved For A Home Mortgage Loan?

The answer to when you should get pre-approved for a mortgage is simple before you begin looking at houses. As mentioned above, many buyers don't understand why this is important. Below are several reasons you will be glad you obtained a pre-approval for a mortgage before looking houses!

Correct Potential Credit Problems

It's not unusual for a potential buyer to not know what their credit score is, especially first-time buyers. It's also possible and common that a buyer isn't aware of problems with their credit. The most common problem with a potential buyer’s credit is their score. There are minimum credit score requirements that each lender has for each one of their loan products.

Another common credit problem is an error with a buyer’s credit. Most people don't monitor their credit report. It's possible for a buyer to have an error on their credit that is really not their credit problem. The process to get errors removed from a credit report can include sending letters to the creditor and the credit bureaus. It can sometimes take a couple of months for it to get corrected on your report and for your score to be readjusted.

We Used Shaun As Our Broker To Purchase Our Home As Well As Refinance It A Year Later

Shaun is an excellent broker, knowledgeable, responsive and easy to work with through the process. We used Shaun as our broker to purchase our home as well as refinance it a year later. He was great at letting us know the right time to refinance.

Nicole S. 
Homeowner 

Eliminate Disappointment

No one likes to be disappointed or a disappointment. The same goes for someone who is purchasing a home. Another very important reason why a pre-approval should be obtained before looking at homes is that it can eliminate disappointment. Unfortunately, there are many real estate agents who show houses to a buyer even though they or the buyer, have no clue whether they can afford a home or not. This is a disservice to a buyer more than anybody else.

Why is this a disservice to the buyer? The fact of the matter is, a buyer can “fall in love” with a home, submit a purchase offer, and find out once they speak with a mortgage lender that they cannot obtain that home due to credit problems or because of other reasons. This understandably can leave a buyer upset, heartbroken, and disappointed! This can all be avoided by having a mortgage pre-approval before looking at homes. Understand All of the Costs of Buying a Home

There are many costs associated with buying a home. It’s not as simple as a 3% down payment. By getting a pre-approval, you will have a very strong understanding what costs you should expect, so there are no surprises. The first thing you will learn is that everybody has to get a “piece of the pie.” Typically, you have to pay a full year of real estate tax, an entire year of homeowners insurance, and many miscellaneous costs. Bottom line, get pre-approved so you have a full understanding how much money you will need to close on your dream home, who you will be paying these costs too, and also why you are paying these costs.

Self Employed or Commission Based Buyers

If you are self-employed or are considered an independent contractor, getting a pre-approval is extremely important to do before looking at homes. There are many rules that apply to those who are self-employed versus those who are an employee of a company. Several years back, there were lenders who allowed self-employed purchasers to obtain a "no-doc" or no-documentation loan, which allowed a buyer the opportunity to purchase a home without providing all the necessary documentation that is required by lenders these days. The days of "no-doc" loans are gone.

If you are a self-employed buyer, you will need to provide at the very least, 2 years tax returns. Does your income heavily rely on commission? If so, like a self-employed buyer, there are different requirements that a lender will have. Often lenders will require 2-3 years proven history showing the commission amounts earned is fairly consistent. Normally a lender will take the 2-3 years history and average them out. For example, if a buyer has a sales position and they have a three-year commission history of $100,000, $200,000 and $150,000, the will likely use an average expected commission income of $150,000 or less. A lender wants to be comfortable that the commission income is obtainable, year after year, before approving the loan.

Multiple Offers

Depending on the real estate market and the time of the year you are looking to purchase a home, it’s a strong possibility that a home will have multiple offers. Another reason to get a pre-approval for a mortgage is the advantage it can give to a buyer when in a multiple offer situation! A pre-approved buyer is likely to win in a multiple offer situation against a buyer who only has a pre-qualification letter, assuming the majority of the other terms in the purchase contract are fairly similar.

Any real estate agent who tells you that a pre-qualification letter is as good as a mortgage pre-approval is not telling the truth or doesn’t understand the difference themselves! A great seller's real estate agent is going to advise their client that a pre-approved buyer is a much stronger candidate than a pre-qualified buyer.

Quicker Closing

Real estate transactions generally take 30-60 days from contract to closing. The key word is "generally." One important thing to understand when buying a home is contract dates may not always be met 100% of the time on the target! A pre-approved buyer will be able to close quicker than a buyer who is pre-qualified.

The main reason a quicker closing can happen is that the majority of the background checking has been completed by the lender prior to obtaining an accepted offer on a property. Once a pre-approved buyer is under contract and any inspections are completed, the lender can order the appraisal on the property. As a pre-approved buyer, you will have already filled out the mortgage application, given the past few years tax returns, and your credit has been reviewed with a "fine-toothed comb."

As you can see, there are many reasons why having a mortgage pre-approval is important and why it should be done before you look at homes. A great real estate agent should give many of the same above reasons why it will be beneficial in the long run! Don’t make the mistake that many buyers do, which is not getting their pre-approval in order before looking at homes.

Shaun Whiteman
 

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