As the housing market appears dim due to rising rates and decreased affordability, being able…
Featuring Guest Author: Rick Geary, Loan Officer
What is a Mortgage Pre-Approval?
If you’re starting to think about buying your first home, there are probably several thoughts running through your mind. How do I start the mortgage process? How do I make an offer? How do I talk to the agent for the home I have my eyes on? Before reaching out to that property’s listing or seller’s agent, we strongly recommend you have a pre-approval from a mortgage lender, ready in hand.
You’ve probably heard of the terms pre-approval and pre-qualification more times than you can count, but what exactly is a pre-approval? A mortgage pre-approval is a letter given by a lender to a potential homeowner as an offer to lend a specific loan amount for a home. Obtaining a pre-approval is one of the most crucial initial steps in the mortgage process.
One of the most common assumptions is that a pre-approval is as effective as a pre-qualification, which is not the case. While a pre-qualification is a simple form of verification, a pre-approval gives homeowners the upper hand in buying their dream home.
Why are Mortgage Pre-Approvals Important?
Instead of thinking of the mortgage process as daunting and complex, think of it as a journey. When one decides to embark on a journey, how would one prepare to be in the best position possible when they begin? For adventurers, their preparation may be in the form of initial research, an itinerary, and other items to bring along the trip. For potential homebuyers, a pre-approval is the best way to prepare for the homebuying journey.
When you look at homes through open houses or talk to an agent from a listing you came across, they’re most likely going to ask if you already have a pre-approval. Why is that? For starters, realtors try to be as efficient as possible with the home buying process, especially if they’re selling a home on someone else’s behalf. They might not be interested in speaking with potential buyers if they don’t have verification claiming they’re financially able to buy a home. In turn, having a pre-approval ready lets realtors know that you may be a serious buyer and that the seller should consider you and your offer.
How to Pre-Qualify for a Home Loan
Before we get into how pre-approvals work, we need to address pre-qualifications. While you can get pre-qualified for a mortgage, most of the time it may not be strong enough for sellers to consider your offer seriously. To find out why, let’s take a deeper look into pre-qualifications from our Orange County loan officer, Rick Geary.
What is a pre-qualification?
Pre-qualifications are merely the simplest and most basic form of setting your housing budget and potential price range for a loan. They usually involve a quick discussion with your mortgage lender on your gross income, a rough summary of liquid assets, whether or not one owns other real property and an overview of a buyer’s credit quality (usually an estimate).
How do I get pre-qualified?
Thanks to credit monitoring services such as Credit Karma or the simplified service offered by many banks today, the discussion on how much you can loan from a lender is now more of an educated guess than it was in the past, albeit still a guess. Pre-qualifications often do not involve a review of a full three-bureau credit report.
The majority of pre-qualifications do not verify much information beyond a recent paystub, W-2, or online bank balance. Again, their best use is for roughing in a price range and budget, but likely should not be relied upon as good-to-go for securing loan approval. Pre-approvals are the best method for this.
How to Get a Pre-Approval for Home Loans
Being pre-qualified may sound similar to being pre-approved, but there are differences in their value and how they’re processed. Pre-approvals tend to be more complex and require multiple systems to come up with a final pre-approved loan amount for the buyer. Rick Geary talks more about the true value of pre-approvals.
How are pre-approvals processed?
There are now two levels that pre-approvals undergo. The first level is an electronic pre-approval. This version involves a full, three-bureau credit report being run and reviewed by the loan originator or their team. Income documentation is usually required and reviewed as well as liquid asset details – i.e., bank and investment account balances, and retirement accounts in some cases.
The figures from all of the credit, income, employment, and asset documents are entered into the loan origination software. This data is then submitted to electronic underwriting systems, or engines as they are sometimes referred. In under a minute, these engines look for clues as to the strengths and weaknesses of the data in the file and the results of this are presented as findings. The findings list out all the required follow-up tasks for the lender, and it specifies any further documentation to be supplied by the mortgage applicants.
What happens after the pre-approval process is complete?
Enter the fully underwritten pre-approval! This is now the most valuable review of an application that gives the true weight of a valid, fully underwritten pre-approval. If you’ve made it to this step, congratulations! With a fully underwritten pre-approval completed, everything about the applicant(s) has been reviewed, tested, verified, and determined to be valid and legitimate in both forms and figures.
A fully underwritten pre-approval certifies the applicant’s ability to obtain credit for the loan amount specified, to provide the needed closing funds and reserve assets, and to successfully close escrow on a home up to the specified price.
What else should I know about pre-approvals?
All open questions about the applicants will be answered with a fully underwritten pre-approval. This is extremely valuable to a seller who is anxious about whether their home will sell. In the hands of a skilled real estate agent, a fully underwritten pre-approval is very competitive with an all-cash offer! It is not uncommon for buyers with full pre-approvals to beat out cash-offers, even in a competitive market. This is where an experienced loan originator and real estate agent can work as a team to convey the great benefits to a seller of accepting a fully underwritten, pre-approved buyer.
Success Story: Pre-Approvals vs. Cash Offers
With over 25+ years in the mortgage industry, Rick Geary has faced several situations in which pre-qualifications were not as valuable as pre-approvals. From his extensive experience, he knows first-hand that pre-approvals are a way to not only get your foot in the door, but to also gauge your realistic budget for one of the biggest purchases in your life.
A fully underwritten pre-approval demonstrates to a seller they have a buyer who is motivated, organized, does the work required, is fully vetted, has their money already waiting for them. This is the buyer a smart seller will want! We have even had fully pre-approved buyers have an offer accepted for a lower price than an all-cash offer. A great real estate agent was involved in that deal. Working as a team with us, he knew how to use it to the buyers’ advantage. Our Pre-Flight Pre-Approval gave him the right tools.
Most people don’t think of a fully underwritten pre-approval being as good, or even better, than an all-cash offer. This is truly unfortunate because we have seen pre-approvals work successfully many times! Though cash buyers do not have to close escrow, there is no guarantee they will!
Pre-Approvals Prove Strongest!
As a first-time homebuyer, you should know that pre-approvals do not guarantee financing for a home. However, they do put you in a position that makes you favorable to sellers. Instead of losing time on getting a pre-qualification that will most likely turn you away from the door of your dream home, consult with us on getting pre-approved. Our team makes it quick and easy for you, and we tell you all you need to know about the process, so you are fully prepared for the next steps.
Before you apply with us, check out our helpful tips on applying for a mortgage. Remember, buying your first home is a journey, and we’re here to guide you along every step of the way!
About the Guest Author
With over 20 years in the mortgage industry, always putting the consumer first, Rick specializes in residential property loans up to $6,000,000, for 1 to 4 unit properties used as homes, vacation homes, and rental purposes. Also on his team are Reverse Mortgages and commercial loan experts to help save you time and deliver great results. He has successfully funded well over $1 Billion of home loans in over 3,000 transactions, giving him the experience to help you get a low rate and save you hassles and headaches. Accountability. Integrity. Experience. If you are looking at buying a home, whether it’s in Orange County or anywhere else up and down the state of California, Rick’s team is here to help. Learn more.
Financing details are for educational purposes only. All views and opinions do not constitute financial or legal advice and reflect requirements at the time of publication. Rates, program terms, fees, and conditions referenced are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc. dba RWM Home Loans is an equal housing lender licensed by the CA Department of Real Estate #01174642 and CA Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. NMLS# 79445