Pre-Approval and Pre-Qualification
Mortgage Pre-Approval and Pre-Qualification Letters
Before you even begin previewing homes you should get pre-approved or pre-qualified for a mortgage amount in your desired price range. Because when you find your dream house, you need to act quickly. You’ll need to craft a solid purchase offer that demonstrates not only your strong desire to purchase the property, but also demonstrates your ability to perform on contract.
Definition: Mortgage Pre-Approval vs. Mortgage Pre-Qualification
When shopping for a home, these terms are thrown around and often seem to get used interchangeably. While in theory there should be a difference between what these terms mean, in practice there is no industry standard or regulatory guidelines for these definitions and how a lender arrives at pre-approving or pre-qualifying a potential home buyer. With all of that in mind, here are a few thoughts as to how you can try to figure out what a particular lender means if they tell you that you are “pre-approved” or “pre-qualified”:
1. Simply ask them. This may seem pretty basic, but see what the lender tells you about what their letter means. You want them to give you more information than, “This means you can buy a house up to $200,000.” Even if 2 lenders say that you are “pre-approved” it does not mean that they have gone through the same process to get there.
2. How did they calculate your income? You don’t need to have banking or mortgage experience to consider the following situations:
• Are you self-employed?
• Do you have any variable income? Commission, over time, bonus, shift differential, etc.?
• Do you have rental income?
• Do you own other real estate? Even if it is owned free-and-clear or if it is co-owned with someone else not involved in this transaction.
• Do you have investment income?
3. All of the above scenarios are situations where the lender should really be either reviewing your tax returns, asking you very detailed questions about your income, or potentially obtaining other documentation prior to making a decision about what you can potentially qualify for.
Regardless of what the lender calls their “pre-approval,” some lenders will actually have an underwriter review a file without a property to see if they are eligible. The underwriter is the actual person at a bank or lender who ultimately makes the lending decision. It is not always necessary to have an underwriter review every person who is trying to get “pre-approved,” but in certain circumstances it is worth the extra time so that you can know with more certainty that you can get a mortgage.
Cash Purchasers/Proof of Funds
Buyers paying cash for a real estate purchase will be asked by almost all sellers and their agents to provide proof of funds. This can be as simple as a current bank or stock statement showing the necessary funds to purchase the subject property, or a letter from a CPA stating the necessary funds are available to perform the purchase.
A desirable property may have several would-be purchasers. That’s why it’s important to be prepared with a mortgage approval or at least a pre-qualification before you even start looking!
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