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Pre-Qualified vs. Pre-Approved
All too often you hear people use the terms pre-qualified and pre-approved used interchangeably. But the two terms are very different and it is important to understand what those differences are and how to use them to your advantage.
When you decide to buy a house it is important to know how much house you can buy. Many times I talk to clients who have been looking at houses in the $350,000 range, and they like what they see so they decide they want to buy. Unfortunately, their finances will only allow them to obtain a mortgage for $200,000. Those houses that go for $200,000 are usually no match for the ones they looked at for $350,000 and they wind up disappointed at everything they look at. Real estate 101 teaches you to never, and I mean never, show a client a house for which you know they cannot afford. It only brings disappointment to the clients and frustration with the agent.
To get an idea of what a client can spend on a house, real estate agents are trained to compute a pre-qualification. It is a quick crunch of numbers and will give a ball park of a mortgage the buyers will qualify for. Even though I’m a real estate agent, I almost never do pre-qualifications and the reason is the difference between the two.
As I mentioned, a pre-qualification is a quick calculation of how much of a mortgage a client will most likely be able to obtain. There is no money backing this calculation and does not go into any of the details required to obtain a mortgage, such as how long have you been employed, your credit score or any other of these factors that mortgage companies will look at to determine a mortgage amount.
A pre-authorization on the other hand is done by a mortgage person who has the financial backing of a mortgage company or companies. Before a pre-authorization is done the mortgage counselor will run the credit bureau report and obtain the credit score. They will most likely want to see payroll stubs and possibly tax returns to confirm the information provided. Based on this extended information the mortgage counselor can then make a determination of the amount of the mortgage the clients will be eligible for. Never the less, once a buyer signs a contract and they are considered “in escrow”; things can change and the amount of the mortgage can go up or down.
It is important to remember that even though a mortgage company “pre-approves” you for that loan amount, clients need to make a decision of how much mortgage amount they want to spend. There is nothing wrong with going for less than what the mortgage company approves you for.
Once a buyer is pre-approved, they can then start shopping in earnest. It is important that the dollar amount of the pre-approved mortgage be conveyed to the real estate agent who can then search for homes in that dollar range. The mortgage counselor should also provide a letter for the amount of the pre-approval that the real estate agent can maintain in the file. However, I strongly encourage people to not use that letter when negotiating the buying of a home.
The reason I say this is because it can tip the hand of the buyer to the seller. Let’s assume that the buyers have been pre-approved for a mortgage of $300,000. The buyers are looking at a home listed for $300,000 and want to make an offer of $275,000. If the real estate agent provides a pre-approval letter stating that the buyers are approved for $300,000, there is little incentive for the sellers to negotiate for the $275,000 amount. Rather, the mortgage counselor should provide a letter stating that the buyers are “approved for the offered amount.”
There is a word of caution that I cannot stress enough, and that is once an offer is made on a house, the buyers must maintain a conservative approach to their finances. The mortgage company will be checking and re-checking the credit bureau right up to the point of closing and if there are significant changes, the mortgage may be denied.
There have been horror stories of buyers who, after negotiating the sale of a home, went out and bought new furniture to move into their new home. Unfortunately, the increase in their debt ratio resulted in them not being eligible for the loan and the whole deal fell through. Once you make an offer on a house, do not spend anything until the closing.
One bit of advice: Always, and I mean always, have a contingency that the purchase of the house is based on a loan approval. Even if you are absolutely sure that your mortgage will go through, if something happens you want to protect any earnest money you put down.
As the market continues its upward climb some of you may be in the market to buy or sell real estate or may know someone who will be. I would greatly appreciate an opportunity to talk with anyone about the prospects of buying or selling real estate in any part of the country. If you’re not in the Greater Nashville area, I can refer the connection for you in any part of the country and find a professional who will take care of you.
As always, if I can help with any of your real estate needs, please don’t hesitate to text or call me at 615 417-8182 or email me at RolandLow1@gmail.com.