Real estate markets across the country are suffering from low inventory, which means there are few homes for sale and competition is fierce. In these markets, real estate experts recommend that buyers be prepared to pounce when they find a house they like. So how do these low-inventory market buyers prepare for the hunt? The most important step is to get pre-qualified or — even better — pre-approved for a loan.
Some people use these two terms interchangeably, but there is a big difference: A pre-approved buyer has not only talked to a lender, but that lender has verified everything the potential buyer has told them.
In short, the pre-approval process is a documented application. A pre-qualification can happen simply after a discussion about getting to the next step, pre-approval.
When getting pre-approved, lenders will not only ask how much you make, where you work and how much credit card debt you carry, they will also check your scores from all three credit agencies, verify your employment status and income.
They will also need proof that you have enough money for a down payment in an easily accessible account.
Lenders will need several documents to pre-approve you.
Two years’ worth of tax returns
Two months’ worth of bank statements
Two years’ worth of W2 forms
Your last two pay stubs
A copy of a state-issued identification
“This is what most [real estate agents] look for before they work with a buyer,” says Adam McLain, loan officer at Wintrust Mortgage, a Rosemont, Ill.-based lender. “If a client sends me all of their documents, that tells me they’re serious. When they’re just kicking the tires, they don’t want to go through all of that.”
Besides the heavy burden of documentation, some potential buyers are deterred from pre-approval because it requires them to pay a non-refundable application fee. A pre-qualification is free and can be done over the phone or on any number of websites very quickly.
For serious buyers, the most basic advantage of pre-approval is knowing exactly what they can afford before they begin their house hunt. The pre-approval will tell you how much money you will be able to borrow and the interest rate you should expect.
Sybil Martin, a Coldwell Banker real estate broker in Chicago, specializes in working with buyers. She says even when her clients show her a pre-approval letter, sometimes lenders have not done their due diligence (checking tax returns, for instance) so she will call to double check. Unfortunately, she says, pre-approvals that were not thoroughly researched have led to deals falling through or being delayed.
“People can say they make $100,000 and they may have the pay stubs to prove it, but if you wrote off $50,000 then you don’t make $100,000,” she explains.
Martin believes even after the housing collapse, there are still too many lenders in the marketplace giving erroneous information. Consumers should be wary of lenders who are willing to issue pre-approval letters without asking for full documentation. “These lenders are not in the business to lend but to collect fees,” she says.
On the other hand, in a rising market, it’s not uncommon to pay a fee to lock in a quoted interest rate. Rates are historically low right now, and most buyers are not yet paying a rate lock fee. But each mortgage is different, says McLain: “Mortgages are like fingerprints.” They are based on each applicant’s financial picture.
One important note, though, is that preapproval does not commit a lender to issuing a loan.
Before a loan is finalized, there are other factors to take into consideration — the appraised value of the property, whether the property qualifies for a mortgage, the financial health of the homeowner’s association if buying a condominium and the terms of the offer.