Crystal Schip

Many first time homebuyers mistakenly believe that the first step to buying a home is to find the home they want to live in.  In reality, searching for a home should come only after two important things have been completed:  finding the right real estate agent and getting pre-approved.  Today’s post is about the second step — the all-important pre-approval.

Why It Matters

1. Know Your Budget.  The pre-approval will tell you what purchase price you can afford and therefore allow you to shop within the right price range.  The last thing you want to do is fall in love with a house only to later find out that it’s beyond your reach.  Getting pre-approved will save you the heartache of having to pass on a home you cannot afford.  It can also save you from looking at homes far under what you can afford and wasting time where you won’t find what you’re looking for.
2. Save Time.  Similar to knowing your budget, getting pre-approved can also save you from wasting time looking at homes that are either too expensive for you, or far below what you can afford and will not like.
3. Show The Seller You Are Qualified.  Every seller is going to want to see that you are qualified to purchase the home.  Including a lender’s pre-approval letter in your offer package accomplishes this step by showing the seller that a professional has made the determination that you qualify for a loan and can afford what you say you can afford.
4. Know Which Lender You’re Going To Work With.   In a competitive market, like the San Francisco Bay Area, you will have a fast close of escrow once the seller accepts your offer — usually 30 days or less.  So, once your offer gets accepted, your loan will need to be processed right away, leaving you little time to decide which lender you want to go with and gather the necessary documentation.  Doing this research and planning ahead of time can save you a lot of unnecessary stress and delays.

Types of Pre-Approval

Some lenders refer to the types of “pre-approval” differently, but there are generally three variations of determining what a borrower can afford:

1. Pre-Qualification.  This is typically where a lender will look at your income, and maybe your debt and assets, and give you an estimate of how much you can afford.  This does not involve an analysis of your credit report or actual ability to purchase a home, and is based on what you tell the lender.
2. Pre-Approval.  This type of pre-approval is much more involved, and is necessary in the current real estate market.  You will complete a mortgage application and provide documentation to the lender, including pay-stubs, bank statements, etc.  The lender will analyze your financial background and credit worthiness to determine a specific mortgage amount you could be approved for.  You will also get a better sense of the interest rate and loan programs you might qualify for.  This type of pre-approval is much more desirable in the current market because it demonstrates to a seller you are that much closer to getting a home loan, making it more likely they will accept your offer.
3. Mortgage Commitment/Fully Underwritten Pre-Approval.  Similar to the pre-approval described above, a fully underwritten pre-approval is one in which an underwriter has reviewed your loan application and approves you for a certain loan amount, subject to a few conditions (such as a satisfactory appraisal).  This type of commitment can provide you with full confidence that you will be approved for a loan, and may provide some comfort in waiving certain contingencies to the purchase agreement, making your offer even more desirable in the current real estate market.

To discuss pre-approval and lender options, contact me at crystal@crystalrobertsSF.com.