Many buyers don’t understand the difference of a pre-approval letter from a bank or lender versus a pre-qualification letter. Many lenders or mortgage brokers will try to get your business by enticing you with a pre-qualificaion letter for you to give to your Realtor and to the seller of the home you want to buy. However, good and knowledgeable agents and sellers know that the pre-qualification letter is not worth the paper it is written on. Some lenders will issue one based solely on a phone conversation, with the borrowers verbally stating what they earn, owe and plan on spending on a house. News Flash: People Lie. The only person the pre-qualification letter benefits is the lender or mortgage broker, who hopes to keep you as a client. Then, when it’s time for you to get your valid approval, out comes the bait and switch – the rates you were offered, or programs that were available “then,” may not available when you need them.
A pre-approval letter couldn’t be more different. First of all, if you are a Private Banking Client with either your bank or financial institution, you may wish to explore that option first. Many financial firms such as Citibank, Wells Fargo and JP Morgan Chase will offer their clients and/or employees the best rates possible. Some also have strict policies such as you have to have kept a minimum balance in your account for the past X number of years, so get all the facts up front, before you start your home search and lending process.
So on to a “real” pre-approval letter: this involves the verification of assets; debt; employment; income; bonuses and pay structure; and will take into full account your credit scores from the 3 credit reporting agencies. It means the lender has calculated your buying power, and your lending risk. The best pre-approval letters I’ve seen are those that are basically a mortgage approval, with the only outstanding condition being that the house you wish to purchase has to appraise to the selling price. It will also take into account whether you need to sell and close on your current home before buying. This is a big issue for sellers because you can understand the domino effect that could occur if even one of those dominos fall. This type of letter takes longer to get – up to two weeks in some cases – and it involves you in the process more by forcing you to provide the necessary documents for a loan in advance of buying, but, it is the BEST way to proceed.
I recently dealt with a client who works for a financial institution who told me he had a pre-approval letter. I asked to see it multiple times. It was always forthcoming. When he and his wife finally decided on a home to purchase and I said “Times Up – I need the letter for the sellers to take your offer seriously,” I was presented with a pre-qualification letter which was absolutely worthless. So, if I ask to see your pre-approval letter before we get started, don’t be offended. Buying a house will likely be one of the biggest purchases you will ever make and my job is to help you make that purchase seamlessly.
There can be a minimal cost involved to get that pre-approval letter, but many banks or mortgage brokers will defer that cost to closing. You will also be allowed to lock in an interest rate with a full pre-approval letter – something you are not able to do with a pre-qualification letter. With interest rates rising, this makes good financial sense for you. If you don’t find a house within the timeframe the lender offers, you can ask for your pre-approval period to get extended. You can also ask for your rate lock to get extended, but that costs money.
When people ask me for a lender recommendation, I give at least three names out. I would recommend calling my three plus any others you know through your bank, friends or through your place of employment to understand their different programs and to hear their rates. BUT, only get your credit report pulled once. Ask for a copy and then hand out that copy to the other lenders. Multiple inquiries will actually lower your credit score.
You also have the option of pulling your own credit report through a service such as freecreditscore.com, but the lender may need to pull another detailed report as well. However, if you have your own credit report in hand before speaking to a lender, you can check it for accuracy and fix any incorrect credit issues that may bring your credit score down, which could cost you big bucks with your loan. There are many agencies who help people repair credit. If you need this, your best bet is to talk to one of my lenders who have their own trusted sources to help you with this matter.
One final note – initially the pre-approval letter is for my eyes only. I don’t distribute it to others. You may in fact be pre-approved for more than you want to spend and we don’t want a seller to know that. Once you settle or offer on a house, we will ask your lender or broker to customize the letter for that particular house with our offering price. A seller doesn’t need to know you can pay more. But, please, let’s be prepared and not scramble trying to get this together while someone is buying your dream house out from under you because they are better prepared than you are.
Please contact me directly for my lender recommendations. RWalsh@WPSIR.com.