Is a Mortgage Pre-Approval Letter Necessary To Make An Offer on a House?

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Do you need a mortgage pre-approval letter to make an offer on a house? You know you need to get your ducks in a row before looking at homes, but does that include securing a pre-approval letter from the bank?

The truth is, getting pre-approved can actually improve your chances of falling into the sellers’ good graces, so you want to get it done as soon as possible in the home-buying process.

So how organized do your financials need to be before you start looking? Let’s take a look, starting with clarifying what a pre-approval letter actually is.

What is a pre-approval letter?

Mortgage pre-approval is an assurance from a lender to provide you with financing to buy a home up to a certain loan amount.

“It’s a letter from your lender, written on the lender’s letterhead, stating that you are approved for a loan of a specific dollar amount,” says Denise Shur, a Realtor® with 1:1 Realty in San Jose, CA.

To get approved, your lender will collect a stack of paperwork from you that will include pay stubs, federal tax returns, W2s, investment accounts, and residential history. Once your complete financial portfolio is analyzed, the lender will decide whether or not to issue you a pre-approval letter.

Do you need a pre-approval letter to see a house?

Real estate agents prefer showing homes to buyers with a pre-approval letter, because it shows the buyer is financially capable of purchasing.

Agents “need to know if you can really buy a home,” Shur says. That said, a pre-approval letter isn’t mandatory to tour a home.

“All agents are allowed to show you homes, even if you do not have a pre-approval letter,” she adds. It just might not be in their best interest, so don’t be surprised if you get some pushback if you say you don’t have pre-approval.

How a pre-approval letter benefits you

If you don’t take the time to get pre-approval, it’s not just the real estate agent’s time you’re wasting—it’s possibly yours as well.

“There is no sense in wasting your own time and that of an agent to see homes until you are ready to purchase,” says Rosanne Nitti, a Realtor with RMN Investments & Realty Services in Laguna Beach, CA.

Getting a pre-approval letter should be one of your first steps in the home-buying process, she says. “Then when you see something you like, you can act on it.”

As a buyer, that ability to act quickly gives you an edge over people who don’t have certification from a mortgage lender.

How to get a pre-approval letter

Serious about getting serious? Here’s how to get started. You can work with either a loan broker, who can connect you with the right lender, or directly with a bank, if you like the loan program they offer.

“Some banks, like Wells Fargo for example, may even give you a ‘priority buyer’ letter, which puts you on a fast track to get your loan closed quickly once you find a home,” says Shur.

Shur describes the process as follows:

  • Fill out an application. This can be done in person, online, or over the phone.
  • The lender runs a credit check to get your FICO score.
  • It also determines your expenses and income by looking at your financial portfolio.
  • The bank then determines if you qualify for a loan, and if so, what kind and for how much.
  • Finally, the lender puts this in writing as the pre-approval letter.
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7 Things to Never, Ever Do When Buying a Home

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By: Daniel Bortz

Buying a home is exciting and terrifying. After all, this is the biggest financial move most people ever make. As such, there’s a lot of room for error, and even tiny mistakes can translate to tens of thousands of dollars.

The lesson here: Even the most intrepid home buyer should get some guidance not only on what to do, but also what not to do. Look no further than this list, which highlights the most common mistakes buyers make so you can avoid the same fate.

  1. Don’t shop for homes without an agent

By all means, start out by looking online at pictures of pretty houses—the more the better. It’s a vastly useful way to get the lay of the land. But when it comes time to get serious about buying a house, you should find a professional to help you out.

Think of a buyer’s agent as a fairy godparent who’s here to turn your homeownership dreams into reality. This person will guide you through every step of the home-buying process—from finding the right property and writing a winning offer to negotiating home inspection repairs and sailing through to closing.

“You want an advocate who is going to look out for your best interests in the transaction,” says Bellevue, WA, real estate agent Holly Gray.

2. Don’t meet with just one mortgage lender

Once you’ve found a real estate agent, your next step should be to get pre-approved for a home loan. To do that, you’ll have to meet with a mortgage lender and provide a good amount of paperwork, including two years of W-2 forms, two years of tax returns, and proof of funds for the down payment (among other documents).

That mountain of forms is one of the things that prompts many to meet with only one lender, says Richard Redmond, a vice president at ACM Investor Services in Larkspur and author of “Mortgages: The Insider’s Guide.” That’s a potentially big mistake!

Redmond recommends getting at least three quotes from different lenders so that you can survey your options and find the best loan for you. One option you have when shopping around is to meet with a mortgage broker—basically an intermediary who presents you with options from a variety of lenders. No matter what, “you need to feel comfortable with the lender you choose,” says Redmond. “You want a lender who asks probing questions, listens to your answers, and presents you with intelligent options.”

3. Don’t understate your budget

It might sound strange, but a number of home buyers make the mistake of hiding their true budget from their real estate agent.

“Some people are afraid that their agent is going to make them buy the most expensive house that they can afford, so they understate their price range,” says Daniel Gyomory, a real estate agent in Northville, MI.

However, if you’re not upfront with your agent about your price range, you might miss out on a great house.

“If you tell me your budget is $300,000 maximum but you’re actuallywilling to pay $400,000, I may not send you listings that could actually be a good fit for you,” Gyomory explains.

4. Don’t hold out for the ‘perfect’ house

People throw around the words “dream home” a lot. (Heck, we’re guilty of it.) However, here’s the not-so-harsh truth: “There’s no such thing as a perfect house,” says Gyomory. And that’s why he has clients create a list of “musts” and “wants” to identify their criteria and focus on what really matters to them.

5. Don’t make ridiculously lowball offers

You obviously want to get a bargain, but you could lose out on a home that you love by making an absurdly low offer. In fact, a recent survey from Inman found that 15% of real estate agents say the third-largest mistake people make when buying a home is offering too little for a property (that’s behind not talking to a lender first and waiting too long to make an offer).

“When you overlook market data and make a lowball offer, you’re pretty much slapping the seller in the face,” says Gyomory. And if you offend the seller, the person might not even be willing to make you a counteroffer.

Bottom line: Trust your agent to help you assess the value of a house and write a winning offer, says Karen Elmir, a luxury real estate agent in Miami.

6. Don’t forget to budget for closing costs

The home seller will chip in some money at settlement; however, as the home buyer, you have the (unfortunate) pleasure of shouldering the lion’s share of the closing costs. Your mortgage lender should be able to give you a rough estimate of your closing costs once a seller accepts your offer, but as a rule you can estimate that they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500.

7. Don’t make big purchases before you close

Once you have found the right house and get the seller to accept your offer, your loan still needs to go through underwriting in order for you to obtain the mortgage. One thing underwriters do is look at your credit score from the three major credit bureaus—Experian, Equifax, and TransUnion—to make sure your credit hasn’t changed since you were pre-approved.

Therefore, you’ll want to avoid taking on any new debt while you’re in the process of buying a house. Purchasing a car with an auto loan or maxing out your credit cards, for example, could hurt your credit score, which could potentially raise your loan’s interest rate or—in the worst case—get your mortgage application rejected. (In other words: Bye-bye, new house.)

 

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Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference?

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By: Lisa Gordon

When buying a home, cash is king, but most folks don’t have hundreds of thousands of dollars lying in the bank. Of course, that’s why obtaining a mortgage is such a crucial part of the process. And securing mortgage pre-qualification and pre-approval are important steps, assuring lenders that you’ll be able to afford payments.
However, pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.

“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean much.”

We asked our experts to weigh in to help clarify the distinction.

What is mortgage pre-qualification?

Pre-qualification means that a lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount.

But here’s the rub: Most often, the pre-qualification letter is an approximation—not a promise—based solely on the information you give the lender and its evaluation of your financial prospects.

“The analysis is based on the information that you have provided,” says David Reiss, a professor at the Brooklyn Law School and a real estate law expert. “It may not take into account your current credit report, and it does not look past the statements you have made about your income, assets, and liabilities.”

A pre-qualification is merely a financial snapshot that gives you an idea of the mortgage you might qualify for.

“It can be helpful if you are completely unaware what your current financial position will support regarding a mortgage amount,” says Kyle Winkfield, managing partner of O’Dell, Winkfield, Roseman, and Shipp, in Washington, DC. “It certainly helps if you are just beginning the process of looking to buy a house.”

Why is mortgage pre-approval better?

A pre-approval letter is the real deal, a statement from a lender that you qualify for a specific mortgage amount based on an underwriter’s review of all of your financial information: credit report, pay stubs, bank statement, salary, assets, and obligations.

Pre-approval should mean your loan is contingent only on the appraisal of the home you choose, providing that nothing changes in your financial picture before closing.

“This makes you as close to a cash buyer as you can be and gives you a huge advantage in a competitive market,” says Lea Lea Brown, a vice president and mortgage banker with Atlanta-based PrivatePlus Mortgage.

In fact, pre-approval letters paired with clean contracts without tons of contingencies have won bidding wars against all-cash offers, Brown says.

“The reliability and simplicity of your offer stand out over other offers,” Brown says. “And pre-approval can give you that reliability edge.”

So take notice, potential home buyers. While pre-qualification can be helpful in determining how much a lender is willing to give you, a pre-approval letter will make a stronger impression on sellers and let them know you have the cash to back up an offer.

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4 Traits of Successful VA Home Buyers

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By: Veterans United

Veterans and service members have access to a $0 down loan program created to expand access to homeownership.

However, being eligible for a VA loan and actually getting one aren’t the same things. Satisfying the program’s eligibility requirements is a key step, but prospective buyers still need to meet credit, income and other benchmarks.

VA home buyers who get the most from this hard-earned benefit often share some common characteristics. Here’s a look at four big ones.

1. They Know the (Credit) Score

Most VA lenders will require a minimum credit score. The cutoff can vary, but a 620 FICO score is a pretty good representation. That’s considerably lower than what veterans would need for conventional financing, but it can still be a tough figure to hit.

Get copies of your credit reports for free at AnnualCreditReport.com before starting the home-buying journey. Look for mistakes, bad information or any other issues that could be affecting your score.

2. They Have a Handle on Debt

You don’t need to be debt-free to land a VA loan—not even close. But the relationship between your income and debt will play a key role in how much home you can buy.

Paying down high-interest debt can help strengthen your financial profile and maximize your purchasing power. Lenders will often have caps on how much “derogatory” credit you can have, so work to pay down any accounts in collection.

Judgments and liens will have to be cleared up before a loan can close.

3. They Get Pre-Approved

VA loan pre-approval is critical in the current home-buying market. It also makes a ton of sense for prospective buyers. Getting pre-approved gives you a clear window into what you can afford and how much house you can buy. It also shows sellers and their real estate agents you’re a legit buyer likely to make it to closing day.

You can start looking at homes without loan pre-approval. But that also opens the possibility of falling in love with a home and even getting under contract on one that you can’t actually afford.

4. They Prepare for Upfront Costs

The biggest benefit of VA loans is the ability to purchase with $0 down. But home buying comes with other upfront costs. Savvy VA home buyers have at least some cash on hand for an earnest money deposit and to cover the costs of an appraisal and a home inspection.

These expenses can vary depending on where you’re buying and other factors. The good news is VA home buyers can look to recoup most of these costs at closing.

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This article was written by Chris Birk, Director of Education at Veterans United Home Loans and author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.”

 

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