Buyers: the advantages of preapproval...

The advantages of preapproval.

The housing market is warming up in many areas, with multiple offers becoming more commonplace. Buyers who want an advantage in the bidding process will need more than a mortgage prequalification – they will need a preapproval.

The differences between mortgage prequalification and preapproval are significant. Prequalifying for a mortgage is based solely on what a borrower discloses to the loan officer or broker about his/her earnings, credit score, and total assets, including what is available for a down payment. By contrast, a preapproval requires a borrower to provide documentation of his/her income and assets and everything else.

The lender typically pulls the borrower’s credit report and score, while the borrower gathers together almost everything else needed for the actual mortgage underwriting: W-2 wage statements; 1099s; recent pay stubs; bank statements; and statements from Individual Retirement Accounts and 401(k)s; and other assets that could show the borrower has the resources to buy and maintain a home. 
-- An important note here: depending on your qualification, the loan will have a different cost !  Shopping for a loan is therefore often elusive: one would have to apply to different lenders to truly know to compare their rates, at the same given time (rates change several times a day, within the same organization).

A preapproval means that the file has gone through the underwriter of the bank/lender.  If approved, it is nearly certain that the loan will be granted to the buyer, subject to the specificities of the property itself, and a few other standard necessary conditions (like proof of insurance, and such...).

With so many homes receiving multiple offers, a preapproval is essential in today’s marketplace.

The preapproval letter should include the amount a borrower is qualified to borrow, as well as the loan officer’s contact information, and mention that the downpayment has been verified.

I personally advise buyers to obtain a preapproval letter for the maximum amount allowed, under the reasoning that the more qualified you are, the better you can negotiate.  If you borrow a lot less than you can, you advertise that there won't be any problem with you getting a loan.  Case in point: a cash offer is going to be always more attractive for the seller, right off the bat: there won't be any problem with obtaining financing....  What the seller wishes is the best assurance that the buyer he/she chooses is going to close the transaction.  Otherwise, the penalty is: wasting precious marketing time, at the beginning of the marketing period, which is the most important period in the property's listing cycle. 

You can see all the details in this article of the New York Times.

Thank you for reading, and if you have any particular experience in this domain, good or bad, I'd love to hear it ;-)

Francis

Silicon Valley Real Estate

useful links

Current Mortgage rates 


A noteworthy cause:  Habitat for Humanity