As part of our partnership with Trusted Lending Advisors – and this month, my husband the Realtor is joining in, too! – we’re taking a look at why you need to get pre-approved before you start looking at houses to buy.
A lot of people already know that they would be approved for a home loan (if you’re employed and make a habit of paying your bills, it’s generally not hard to get some type of loan), and have an idea of how much house they can afford. So, why should you actually sit down and get pre-approved for a loan if you already know you’ll be approved?
I asked my husband the Realtor why you need to get officially pre-approved before looking at homes to buy, and here was his response:
Even if you know you’ll be approved, there are still lots of other reasons it is imperative to get pre-approved before you start looking for a home. Here are just a couple from the perspective of your real estate agent:
1. How much you want to spend per month: Until you decide on a loan type, down payment, term, etc. it’s impossible to accurately estimate your monthly payment. This means that you don’t know if you’re actually going to be able to afford the homes you’re looking at. (Or you may be comfortable spending more and you’re not seeing everything that is available to you.) It would be like test driving a car without asking what the price is first!
2. Properly formulating an offer: In many (most) transactions we’ll negotiate a seller contribution towards the buyer’s closing costs. However, the amount needed varies considerably depending on the buyer’s loan program and financial situation. I can’t write a good offer that best addresses the buyer’s needs unless I have a pre-approval and closing costs worksheet from their lender first.
3. What kind of house you can purchase: Depending on your loan type, you may be restricted on the condition or type of home you can purchase. For example, you won’t be buying a fixer-upper with your VA loan. Until you’re pre-approved, we may be wasting time looking at homes that don’t fit with your particular loan.
And, I asked Tim from Trusted Lending Advisors to tell me what what to expect in the pre-approval process:
Most banks/lenders will work on a very basic pre-qualification, which normally just entails collecting your basic address and work history, financial info, and running a credit report. The lender will then confirm that your income versus your monthly debts (including the new proposed home loan) appear to be in-line and that you have a decent credit score. This approach normally works fine for your average W-2 employees who don’t own multiple properties or have other “unique” situations (divorce, multiple jobs, etc).
However, on virtually all of our loans, we prefer to work up a full pre-approval for our clients. This entails all the same steps as a pre-qualification, but with additional steps to ensure a client’s ability to buy. We normally collect financial information up-front (see this link for more info on the normal items needed for a full loan approval).
Especially in the case of self-employed borrowers or those with other unique situations, we’ll request 2 years of tax returns, and recent paystubs (if applicable) to review and confirm the amount of useable income that client may have. We will normally also run a client’s file through our Automated Underwriting system, which if accepted/approved gives us about a 95% chance of that loan closing smoothly. We will also research property values (on refinances) and analyze multiple loan options for a client based on their needs.
We’ve found that by spending the extra time up-front, we avoid potential “deal-killing” delays or issues once a client is under contract or has already begun their loan process.
Thanks to Tim and Jeremy for the great info! I know many of you have already used Tim and Jeremy as the professionals for your home purchase this year and have been thrilled with the service.
Don’t forget that Trusted Lending Advisors is offering Springs Bargains readers a lender credit for your appraisal (up to $400 value) on any closed loan transaction! Call them at (719) 266-8183 or send them an email to get started on the pre-approval process for your home purchase loan or refinance!
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Welcome to Springs Bargains, a service of our real estate business, Circa Real Estate Group! I’m Carrie, and since 2008 I’ve been sharing free and discounted ways to eat, play, and enjoy life in Colorado Springs.