Is getting a pre-qualified letter important when buying real estate?

So you’ve decided to buy a new home. The next step is to borrow money and tour the potential real estate that you wish to buy. New homeowners are often wary about getting a loan to buy a new home. Most often wonder if the agents will be willing to show them homes or sell them one if they fail to show their finances.

For this, you must obtain a pre-qualified letter to start browsing the houses. Most agents and sellers look for a preapproval letter over a pre-qualified letter.

What is a pre-qualified letter?

According to Consumerfinance.org,

A pre-qualified letter is based on certain assumptions and it is not a guaranteed loan offer. But, it lets the seller know that the buyer is likely to be able to get financing. Sellers frequently require a prequalified or preapproval letter before accepting your offer on a house.

An agent is required to show you homes even if you don’t have a pre-qualified letter. But the question is, does having a pre-qualified letter really boost your chance of buying a new home?

While Patty Arvielo, a mortgage banker and president of New American Funding attests that,

“I tell most people they can take that pre-qualified letter and throw it in the trash. It doesn’t mean all that much.”

Rosanne Nitti, a Realtor with RMN Investments & Realty Services in California says otherwise. She says that getting a pre-approval letter should be one of your first steps in the home-buying process. There is no sense in wasting your own time and that of an agent to see homes until you are ready to purchase.

Julie Ryan Evans of Realtor.com says that

A borrower is required to get both a pre-qualified letter and a pre-approval letter to become eligible for a loan. A pre-qualified is a lesser of the two. A pre-qualified letter is provided by the lender and contains your eligibility for a loan up to a certain amount. A pre-approval letter also comes from the lender after you submit proof of your assets, income, and expenses.

Todd Kaderabek, a residential broker associate in downtown Asheville, N.C says that,

“A pre-qualified is a good indication of creditworthiness and the ability to borrow, but a pre-approval is the definitive word.”

While pre-qualifying is only the first step in getting a loan to buy a home, a pre-approval letter is a conditional commitment to actually grant you the loan.

Jennifer Beeston, VP of mortgage lending for Guaranteed Rate Mortgage in California says that,

“Borrowers should get a pre-approval letter over pre-qualified letter because they won’t stand a chance with just a pre-qualified letter in a highly competitive market. The buyers are likely to be turned down by the seller before they can actually do anything.”

Roman Ludwing, a real estate broker in Coral Springs, FL claims that,

“Getting pre-qualified isn’t totally useless. It does get your offer in the door to at least show the seller interest while getting the pre-approval letter,”

How to get a Pre-qualified letter?

Getting a pre-qualified letter is the first and quite an easy step.

• You need to supply a bank or lender with your overall financial picture, including debt, income, and assets.
• The lender will review everything and give you an estimate of how much you (borrower) can expect to receive.
• For ease, pre-qualified can be done over the phone or online, and there’s usually no cost involved.
• Getting a pre-qualified letter usually takes just one to three days.

You should be informed that the pre-qualified letter does not include an analysis of credit reports or your ability to purchase a home. It’s only an estimate.

How to get a pre-approval letter?

Getting a pre-approval letter is a second and most essential step.

• It starts with talking to either a loan broker or the bank.
• Fill out an application. This can be done in person, online, or over the phone.
• The lender will run a credit check to get your FICO (Fair Isaac Corporation) score. FICO Scores are based on different factors of your credit data report. This data is grouped into five categories
• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• New credit (10%)
• Credit mix (10%)
• The lender will then determine if you qualify for a loan, and if so, what kind of loan program and for how much.
• Finally, the lender puts this in writing as the pre-approval letter.

Few banks, like Wells Fargo, can also provide a ‘priority buyer’ letter which puts the borrower on a fast track to get a loan approved. Check with your bank if they have any such special provisions.

A lender will collect necessary documents from you including pay stubs, federal tax returns, W2s, investment accounts, and residential history.

The letter may have an expiration date on it (typically 30 to 60 days). Hence, many borrowers wait to get a preapproval letter until they are ready to begin seriously looking for a home.

Free Takeaways

1. Lenders usually preapprove you by assessing your income, assets, debts, and credit record.
2. If you’re preapproved for more than your original home price budget, you can shop around for homes without changing your target home price.
3. If you get preapproved for a lesser amount, you may need to adjust your home price expectations.
4. If you get declined for a preapproval check with your lender, as them why you were declined so you can improve your chances of getting a loan in the future.
5. Ask to see a copy of your credit score the lender used. The lender must send you a notice with the credit score they used to assess your ability if they declined your request based on your credit score.
6. With a good financial reputation, you’re more likely to get a pre-approval letter.

Get in touch with a real estate attorney in Ankeny to solve your credit score problems. Our Ankeny Lawyers will assess your financial history and offer you better solutions to improve your credit score. Mark Grey PLC is the best attorney law firm in Ankeny specializing in real estate and mortgage.