Just as there are many homes available to purchase, there are also many loan choices available. You must decide three things:
- Who will be your Loan Officer
- Which loan product makes the most sense for your needs
- When to lock your rate
When starting the process of buying a home, most people make a few calls and speak to Loan Officers in an effort to become pre-qualified. Before you find the house of your dreams it is a good idea to work with a lender to become pre-approved. That way, the only decisions remaining are what home to purchase and when to lock in your rate.
Pre-approval shouldn’t be confused with pre-qualification. Pre-qualification is usually performed with a Loan Officer over the phone, where the Loan Officer makes an assessment of your borrowing potential based solely on the information you give them verbally. The problem with a pre-qualification is that the Loan Officer is not the Underwriter, therefore does not make the decision regarding loan approval or denial.
A True Pre-approval is the process of documenting four categories and having the actual Underwriter sign off on the file. These four categories are:
- Income and Employment (this can be stated income)
- Liquid Assets (usually funds in an account for at least two months)
- Credit and FICO score (which includes debt)
- Information about the property you’re looking for
Since the FICO score is the most powerful factor that influences your ability to receive approval, Underwriters want to see a Tri-Merge Credit Report (a credit report containing information from all three credit agencies). They will usually use the middle score of the three credit reporting agencies (Experian, Transunion and Equifax), to determine how much you are qualified to purchase.
Starting the home buying process with a pre-approval helps you determine if there are any surprises on your record, allowing you to resolve them with plenty of time and less stress. There are many instances where a FICO score is damaged by someone with a similar name, or even due to clerical errors. And since the FICO score is the main determining factor, inaccurate information can severely affect the rate you receive, and at times even eliminate the possibility of approval.
Pre-approval offers you strong negotiating advantages by increasing your buying leverage with sellers. It lets the seller know you are ready to buy without restriction. When faced with several offers, a seller often accepts the one submitted by a pre-approved buyer, even if the offer is less than the others. This is due to the fact that pre-approval is the next best thing to cash-in-hand. You might also be able to negotiate better contract terms, as a pre-approval allows you to close quickly.
You wouldn’t go to the grocery store and fill your cart up without first knowing what is in your checking account. Likewise, you should insure that you can afford the home of your dreams before you find it.
For these reasons, pre-approval is an intelligent and advantageous option for prospective home-buyers.