When buying a home, it is very important to be Pre-Approved for your mortgage in advance. The reasons for this vary from calculating affordability to presenting a stronger contract. The issue is that the definition of this Pre-Approval varies depending on the context in which it is used. This guide should help you understand what Sellers are asking for when they advertised "Pre-Approved Buyers Only".
The phrase "Pre-Approved" brings up a question of semantics. The best way to further this discussion is to define the terms Pre-Qualification and Pre-Approval.
Pre-Qualification is a process whereby the buyer's income, credit and assets are analyzed. There are several factors that are measured which are important to lenders when they are underwriting your file. They are:
- Affordability - How much property you can afford?
- Credit Score and History - Have you paid your past debts?
- Ability to Repay - Debt Ratios = expenses / income
- History of Savings - Do you overspend every month?
- Stability of Income - Has your pay dropped or spiked this year?
- Stability of Employment - How long at your current job?
- Availability of Down Payment - How much can you put down?
- Adequate Reserves - Can you afford the mortgage without income for a certain amount of time? Can you afford to close?
It is essential that all of these factors are weighed to give you a legitimate chance of getting the loan approved.
The findings in the Pre-Qualification will also help you and your Realtor decide the home prices to search in the MLS. This prevents falling in love with a house just to find up that is $50,000 out of your price range.
Pre-Approval is a step PAST what you see above. It is actually only available after your complete loan file is submitted to a lender. The additional steps required to come up with a Pre-Approval are:
- Signing of Loan Application
- Collection of Bank and Asset Account Statements
- Collection of Tax forms and 1009s / W-2s
- Verification of Employment
- Verification of Business Owned if Self Employed
- Submission of all documents to Lender
At this point the lender will underwrite the loan file and come back with a Conditional Approval - a.k.a. a Pre-Approval. This is only a Conditional Approval because there will be conditions that the lender places on the loan that must be met prior to closing. These conditions will be:
- Receipt of satisfactory, fully executed sales contract
- Appraisal meeting or exceeding value of house
- Re-pull of credit if it takes longer than 30 days
- Updating of all bank statements and asset accounts
After these documents are reviewed and signed off on by the Underwriter, the loan should have Final Approval or Commitment and be Cleared to Close.
A Pre-Qualification is therefore very important. It is not a guarantee, though!
As you can see by the two descriptions, the Pre-Qualification is just a necessary step by the Realtor and Mortgage Originator in the homebuying process. It helps determine how much house a buyer can afford. It also helps outline how much of a payment the buyer can handle based on real numbers like income, savings, expenses and credit scores.
"Pre-Approved Buyers Only"
When trying to satisfy this Seller requirement, a buyer should realize that the difference in a Letter of Pre-Qualification and a Letter of Pre-Approval is much more than just semantics. It can take between a few days and a couple of weeks to get a pre-approval. It all depends on the particulars of the loan file and the lender itself. This is why it is important to get started on the loan application before shopping for the property
A Letter of Pre-Qualification should only detail that a buyer appears able to purchase a home at a particular price point based on the information they provided. The caveat to a letter of Pre-Qualification is that it should always say that it is not a commitment or promise of one in the future but instead a judgement based on the experience of the parties involved.
A Letter of Pre-Approval is the document that is actually prescribed by Realtors and desired by Sellers. This is proof that the lender has already approved the buyer for a loan and is just waiting on a property to put with the loan. This is the "Golden Ticket" that you will need need to have in hand to successfully move along the path to homeownership.