Thus far in the series, we’ve covered how to discover your ideal neighborhood, drawing up your dream house (with a checklist of amenities) and how to choose the right realtor. Now we’ll focus on prequalifying and obtaining preapproval for a loan and how essential these are to the home buying process.
After you have an idea of the location and type of home you want to live in, it’s time to start putting things into action. While you begin to look for local realtors and think about what you really want in a real estate agent, also start the loan prequalification and preapproval process. Finding out the loan amount you qualify for and the monthly payment amount you are able to afford will help you further narrow down your house hunt.
First of all, there is a difference between prequalification and preapproval for a loan. According to the Consumer Financial Protection Bureau, a “prequalification is a lender’s estimate of how much you could be eligible to borrow based on information you supply.” This refers to information about your employment, income, housing situation, any possible debt, reserves and the cash available for a down payment. A prequalification does not guarantee you will be approved for the loan, is not a commitment between you and the lender and is usually free. On the other hand, preapproval means “that the lender is ready to make you a mortgage loan based on the information and documentation you provided at the time you requested a preapproval.” This will state for how long the preapproval is valid and any conditions you must meet to actually receive the loan.
A Pre-Qualification Letter isn’t necessarily what you’ll need to make an offer, but it’s nice to know the price range you’ll be working with as you continue searching for your dream house. This step is important insofar as it determines if you’re even eligible for a loan.
Getting preapproved, on the other hand, is of the utmost importance and has many advantages. First of all, some real estate agents won’t take on buyer clients who aren’t preapproved, meaning you may not have the final say when picking who will represent your home buying interests. Being preapproved will also make you look better to a seller; s/he will know that his/her time isn’t being wasted on an offer that may not go through.
Getting preapproved is similar to applying for a loan, but takes place before you have selected a property. Once you have the preapproval, you can house shop with confidence, knowing that you’ve been financially cleared.
The first step in the preapproval process is to find a lender. This person is going to help you finance the home of your dreams, so look for an experienced professional who will guide you through the process. Begin by doing your research on and offline. Ask for recommendations from friends, family, coworkers and your realtor; find out who they’ve used and the quality of their experience. Once you have some reliable recommendations, look at reviews, ratings and whether the lenders you’re considering are licensed, online. Check out websites like BankRate.com where you can find information on various lenders. Other notable sites include QuickenLoans, which has strict but efficient loan programs. There’s also the FHA, which makes it easier to qualify for a loan and work with minimal down payments.
Unfortunately, not all lenders are honest. So, if a promised rate or costs are too good to be true, they probably are. Some lenders will say anything to get you to commit to a loan, then hike the rate or unfairly adjust additional costs. If this happens, you may lose out on the home of your dreams because when it comes time to close, it’s too late to find another loan.
Once you’ve narrowed down the list of potential lender candidates, sit down with two or three of them to find out which one is truly a good fit for you and your needs. Ask what each lending option means for you, who will service your loan, and the lender’s average turnaround time. The latter inquiry will help you avoid picking a lender who may have a history of delayed loans.
Remember that a lender can make or break your experience—s/he can make a transaction a piece of cake or a total nightmare. According to Jim Droz, a top real estate agent, the most important things to consider are a lender’s honesty, efficiency and reputation. Always prioritize reputation over rate.
Once you’ve secured a lender, it’s time to get preapproved. In order to become preapproved, you will need to complete an official mortgage application and supply the lender with all of the pertinent information (outlined above), allowing him/her to perform an extensive check on your credit score and financial history. This process will allow the lender to give you a specific mortgage amount for which you qualify as well as the interest rate on the loan.
By completing this process, you’re one step closer to obtaining an actual mortgage. This especially comes in handy when you find the perfect home—you can move quickly, avoiding an offer being contingent on you obtaining financing. Not only will this save you time in a competitive market, it will give the seller more confidence in your offer.
Once you’ve found the perfect house, the spaces for “property” you left blank in your mortgage application will be filled in with your future address, and your preapproval will become a complete mortgage application.Newbie Home Buyers Series, Part 4: The Importance of Prequalifying and Being Preapproved for a Loan by Lolly Spindler