Monday, August 1, 2022 / by Carolyn Kampa
The real estate market is pretty crazy right now with limited inventory and sellers getting multiple offers. We occasionally hear from buyers, "Why do I need a mortgage pre-approval letter?" For the answer, I reached out to our good friend Pam Beattie, Branch Manager at Waterstone Mortgage here in Appleton to share her thoughts.
Today getting a pre-approval letter is a necessity due to a tight, competitive market. Sellers may have many offers to choose from. A pre-approval letter proves you have been vetted and are a serious buyer who has done their homework, and not just a “tire kicker”.
It also makes sure a buyer is not shopping in the wrong price range. That can lead to disappointment in the buying process as homes in a lower price range may pale in comparison to others they have seen.
I recommend you use caution. Not all mortgage pre-approvals are created equal. Some online pre-approvals may be missing important information.
Local lenders know the local real estate market, and they look out for the best interest of their buyers and sellers. They live and work in your community. You need to be able to trust the lender you are working with. I strive to build a responsible, caring relationship with my clients.
What is the difference between pre-qualification and pre-approval?
Many times the terms pre-qualification and pre-approval are used interchangeably. A pre-approval letter will have the documents to back it up. They include: 2 years tax returns, 2 years W-2s, 60 days of bank statements, and 30 days of paystubs. If you currently own a home, your most recent mortgage statement and proof of homeowners insurance will be needed. A credit report will be run, and we'll need your driver’s license and social security numbers. If there has been a recent divorce, bankruptcy, or foreclosure those documents will need to be provided as well.
When I give a pre-approval I don’t want to let anyone down, and I want to make sure I do the due diligence upfront.
Doing a full pre-approval up front can uncover potential stumbling blocks in the beginning. Maybe the buyer finds out they are not quite ready and they need to do some credit repair. They may find out there is an outstanding collection or past medical bill on their credit report that needs to be addressed. Lenders can make suggestions to help with that process.
They may have a low credit score, a recent bankruptcy, or not enough cash for closing costs. The answer is not necessarily no, it may just be...not quite yet.
How do I apply for a mortgage?
Applications can be done over the phone or via email, or we have an online application. Going through the process serves the buyer’s best interest in the long run. They can feel confident they are well-qualified. It helps eliminate disappointment they can’t buy, or look in the price range they thought they could.
Buyer education is so important. Buyers need to understand what they can afford. What escrow is. What PMI (private mortgage insurance) is. How much cash they will need for closing.
How far in advance should someone go through the pre-approval process?
A credit report is valid for 120 days or 4 months. The process is free. The education is free, and it can help make decisions on timing. Your documents can be updated as you go through the process.
There are different types of financing. With good credit and cash for a down payment there may be multiple options for a buyer. Without those, there may only be one type of loan. You always have to ask, what is most comfortable for the buyer?
They see 0% down payment programs but may not know that doesn’t mean they don’t need cash. They still need cash for closing costs.
Buyers may find they are pre-approved for a higher amount than they want to spend. They need to look at their budget. The approval is based on debt and gross income, and it does not take into account monthly expenses like cable TV or cell phone bills. Underwriters use what is reported to the government.
What are you comfortable spending per month? What are your priorities? You want to make sure you don’t buy more than you can or want to afford. How much are you comfortable paying monthly for your home? In addition to principal and interest, you need to include the cost of homeowners insurance, property taxes, and maybe PMI in the total monthly payment.
How long does it take to get a pre-approval letter?
I can get it done in one day if I have the documents to run through our automated underwriting system.
Thanks so much Pam! This was really helpful. Buying a home is often the largest purchase someone will make. You want to start the process out on solid ground to ensure there is trust between the buyer, lender, and REALTOR®. Are you thinking about purchasing a new home? Give Pam a call today at (920) 750-5002 to see how she can help get you into the home of your dreams!