by Deidre Spears
Client: Hi Deidre, I was reaching out to you because I want to buy a house.
Deidre: I can absolutely help you with that! Have you been pre-approved by a lender?
Client: (Silence) (Crickets)
Deidre: It’s ok, I’m here to help you get started.
That is how approximately 80% of the conversations start when I’m first contacted by a client seeking my services. And it’s ok! We don’t know what we don’t know. This is something I had to learn on my own, as I was never really taught about anything related to finances to be honest.
Purchasing a home was never even on my radar growing up, so I never bothered to get educated about what the process entailed. It wasn’t until I was looking to purchase my own home that I was forced to learn the ropes. And there are a lot of ropes! But with the right guidance from a REALTOR® such as myself, you can be on your way to the home of your dreams.
So, what’s a pre-approval you ask. A pre-approval is you proving your creditworthiness prior to having a contract to purchase a home in place. This starts when a loan officer has looked at your finances (monthly income, debt, assets, and credit history) and determines how much you can afford as a monthly payment, how much money you’re eligible to borrow, and your interest rate.
You will also hear the term pre-qualified thrown around as well. They are not the same. Pre-qualified means a lender has determined that you’ll most likely be approved for a loan up to a certain amount based on your current financial situation. No information is verified with a pre-qualification, it is simply based on what you say without actually proving anything. If you’re simply tinkering with the idea of a home purchase, then a pre-qualification may be the direction to go in. Some of the benefits are no effect on your credit score, it gives you an estimation of what you can afford, and there are normally no fees associated with it.
Just to reiterate, during a pre-approval you provide your pay stubs, bank statements, asset information, monthly financial responsibilities, and an actual credit report is pulled. This information is then verified by the lender; hence you are obtaining a pre-approval vs. a pre-qualification.
There are benefits to obtaining a pre-approval prior to home shopping. First off, you will rarely be able to obtain experienced REALTORS® services without one. If you are unaware of what you can truly afford or know if you’re even in a financial position to purchase a home, it can be a waste of time for all involved parties to begin home shopping. Having a pre-approval also lets a seller know that you’re serious about purchasing a home. A seller needs to be confident that you have the means to complete the transaction, so not having a pre-approval can be a huge detriment to even getting a purchase contract accepted.
Now for the other side of a pre-approval. It does not guarantee you getting a loan! I repeat there is no guarantee of a loan because you have a pre-approval. You must clear what’s referred to as underwriting before your loan is “clear to close”.
Underwriting is the process by which your lender verifies your income, assets, debt, and property details in order to issue final approval on your loan application. This final approval sometimes happens only days prior to the closing of your home. They want to make sure your financial well-being has not substantially changed just prior to closing. Essentially, they don’t want the “okie doke” pulled on them. People’s financial circumstances can change from the time the home search begins until they find a home. Unfortunately, people lose jobs, lose spouses, or have some catastrophic event(s) take place that ultimately hinders their purchasing power. It is an underwriter’s job to find that out if an unfortunate situation occurs or even irresponsibility, so they dig “all up in the business”! They’re being nosey, and rightfully so. I mean they will potentially be loaning you hundreds of thousands of their company’s dollars to execute your purchase.
So that is pre-approval in a nutshell. It is generally the very first step taken when you are serious about purchasing a home.
If you’re in the Dallas Ft. Worth area and need any help navigating the process, or just have questions please reach out to me at my email address or call me. I got you!