The Importance of Financing Pre-approval
Before you can buy a house, you have to know how you’ll pay for it. If you’re like 88% of homebuyers, that means financing the purchase with a loan.
There are two options to find out what a bank is willing to lend you: prequalification and preapproval. Quite often we hear those terms used interchangeably but they are not the same.
The difference between prequalification and preapproval is merely a matter of reporting financial information versus providing documentation for it. A pre-qualification letter from a lender means you’re conditionally approved to purchase a home up to a certain price, based on basic information about your income, debt and how much you have saved for a down payment. HOWEVER, when a lender prepares a pre-qualification letter, it is based on the information that you, the borrower, have reported to them.
With preapproval, you’re not only reporting the details of your financial information to a lender, you are also providing documentation to verify the information. This could include ta returns, paystubs, bank statements and employment verifications.
A preapproval means the lender is stating confidence in lending you a certain amount of money to purchase a home, pending any issues with the house itself or unforeseen circumstances with your finances.
Why does this make a difference as you shop for a home?
Well, as you can imagine, a preapproval letter can be far more powerful when it comes time to place an offer on a home. That's because with preapproval, the seller has proof of your lender's confidence in you as a borrower. In fact, most offers on a home will not even be accepted unless they are accompanied by a pre-approval letter.
Let’s say for a moment that you were a motivated seller and you had 2 offers come in on your home. One is a cash offer $1,000 below asking price. The other is $1,000 over asking price however the buyers haven’t even spoken to a lender yet. Even their agent doesn’t know if they can qualify for a mortgage. If you were the seller, which offer would you take?
The cash offer, right?
Of course, and most sellers would. In essence, by being pre-approved for your financing turns you into a cash buyer, saves you money and give you leverage in multiple offer situations. And do you know the best part? It gives you the confidence knowing that every home that we show you can qualify for and purchase!
In addition to the strength that a preapproval provides, timing is a very real issue that buyers face in our current market. So often we are competing for homes in multiple offer situations and timing is of the essence. With a preapproval in hand, we can move quickly to submit an offer and have a better chance of winning the home of your dreams.