Ensure Mortgage Preapproval Before Making an Offer in the Real Estate Market
Securing preapproval for a mortgage is no longer just a recommendation; it’s a necessity in today’s robust real estate landscape. Before you even think about submitting an offer, having your mortgage preapproval in place is crucial. Sellers are reluctant to engage with potential buyers who haven’t taken this important step.
In a competitive real estate market, where opportunities abound, being preapproved can set you miles apart from your competitors. Preapproval signals to sellers that you are a dedicated buyer with your financial affairs well-organized.
Let’s delve into the process of obtaining preapproval, the necessary documentation, and the significance of this step. But first, it’s crucial to distinguish between being prequalified and being preapproved, as these terms are sometimes mistakenly used interchangeably.
Differentiating Prequalification and Preapproval
Prequalification, while beneficial, doesn’t hold a candle to the importance of being preapproved. When you prequalify for a mortgage, you’re essentially getting an estimate of your potential borrowing capacity. This is based on the financial information you provide, coupled with a credit check.
Think of prequalification like dating; it’s a stage of getting to know each other, but not a fully committed relationship. The lender hasn’t firmly committed to supporting your home purchase. You can utilize the prequalification process to explore whether an adjustable-rate or fixed-rate mortgage suits you better.
On the other hand, preapproval is the closest you can come to confirming your creditworthiness without an actual purchase contract. It involves completing a mortgage application, with the lender thoroughly verifying the information you supply, including a credit check.
Upon preapproval, you’ll receive a preapproval letter, which is essentially an offer to lend you a specific amount, typically valid for 90 days. Once this period elapses, you’ll need to initiate the preapproval process again if you haven’t yet secured a home.
Comparing preapproval to engagement, it signifies a high level of commitment, akin to planning marriage. However, unlike engagement, there’s no costly ring involved. Both prequalification and preapproval are generally free.
Remember that, in both cases, the mortgage rate offered remains an estimate until you finalize a contract and lock in the rate.
Steps to Attaining Mortgage Preapproval
Begin by finding a reputable lender, either online or through an existing banking relationship. Especially in a climate of high demand for refinancing due to record-low interest rates, not all lenders can accommodate purchase loans.
Key Information Your Lender Requires
- Timing: Communicate your approximate buying timeline. Ideally, aim to secure preapproval a day before locating your ideal property, as preapproval has an expiration date.
- Price Range: Provide the lender with the property’s estimated price range. If you’ve already identified a specific property, sharing its listing helps. It’s important to gain approval for the maximum property price, as it’s easier to reduce your preapproved amount than to increase it.
- Credit Check Consent: Preapproval and prequalification necessitate a credit check. This generally incurs no cost and should not significantly impact your credit score, unless multiple checks occur within a short span.
- Current Residence Plans: Detail your intentions for your existing residence, such as selling or renting it out. Standard options also include leaving the property vacant, converting it into a home office, or allowing someone to reside there rent-free.
- Duration at Current Residence: If you’ve recently refinanced your primary residence and intend to obtain a purchase mortgage from the same lender, be prepared for potential underwriting complications. Some mortgage refinances mandate a commitment to live in the home for the next 12 months.
Necessary Documents for Mortgage Preapproval
Your lender will typically request the following documents for preapproval:
- Two most recent paystubs (covering a couple of months)
- Two most recent W-2 forms (covering the past two years)
- Two most recent 1099 forms if applicable (covering the past two years)
- Two most recent tax returns (covering the past two years)
- Two most recent investment statements (covering a couple of months)
- Two most recent checking and savings account statements (covering a couple of months)
- Latest business profile, loss statement, and balance sheet if applicable
- Mortgage and HOA statements for investment and vacation properties
- Explanation for significant banking transfers or deposits exceeding $1,000 in the last two months
- Printouts of large check deposits exceeding $1,000 during the past two months
Additionally, your lender might request a brief statement explaining your motivation to purchase. If you’ve recently acquired another property or refinanced your primary mortgage, expect to clarify your actions.
Importance of Mortgage Preapproval
Thorough financial preparation significantly enhances your experience in a substantial purchase like real estate. When feasible, an all-cash offer is ideal for securing the best price and minimizing risk.
Amidst the intricacies of real estate transactions, an offer without a financing contingency holds immense value. Such a contingency grants the buyer an exit strategy should mortgage approval falter. Eliminating this contingency, while not as solid as an all-cash offer, boosts the seller’s confidence in the deal’s stability.
A no-financing contingency offer can even be as compelling as an all-cash offer, particularly when paired with other incentives like waiving inspections and expediting closing.
Ultimately, being prepared through preapproval or prequalification empowers you in the real estate realm. Understanding the pivotal role of mortgage preapproval puts you in the seller’s shoes, shedding light on the significance of a well-prepared offer.