The Power of a Mortgage Pre-approval Letter

Looking at houses is fun, but talking about money is not.  Do yourself a favor and before you go to crazy looking at houses, take the time to get pre-approved first.  It will prevent a lot of aggravation and heartache to have a good mortgage pr-approval letter.

• Tip- Do not under estimate the power of a good mortgage pre-approval letter.  A good mortgage pre-approval letter can save you time money and aggravation.

The difference between a pre-qualification letter and a pre-approval letter

A mortgage pre-qualification letter is where you call a mortgage officer, he asks you a few questions and he pushes out a letter saying you are pre-qualified for a certain amount.  Think of a pre-qualification as an unofficial estimate of what you may be able to afford.

Underwriting a mortgage is difficult in this lending environment.  There is nothing worse than falling in love with a home and putting in an offer, to find out you can’t get approved for a loan.  Not only that, it can put your deposit money at risk.

A good listing agent will know the difference and not allow your offer to be reviewed by the seller based on a pre-qualification letter.  To take this a step farther, your offer may not be considered in a multiple offer situation and you may never know why.

A  mortgage pre-approval letter is where a mortgage officer takes it a step farther.  He pulls a tri-merge credit report.  This is the actual credit report that is used by your lender.  In conjunction with the credit report your mortgage officer will ask for documentation of your income and your assets and review them.

The important factor is a mortgage officer will identify any potential problems and receive clarification.  From there they will issue a pre-qualification letter that will usually state your down payment and the amount you have been for which you have been pre-approved.

What are common problems that a pre-qualification letter won’t catch?

Here are just some quick problems that get flushed out with a pre-approval that won’t be caught on a pre-qualification.  You can start to see that it can be a little more complicated than telling someone what you make, how you feel your credit is and the assets you have.

• Overtime- If you were using overtime as part of your income calculation, that can create a problem.  For overtime to be used you must show it is steady and re-occurring.
• Part-time Job- Part time income is another problem.  If you have a part time income, you must document you have had it for two years to apply the income to your total income.
• Gift Funds-  You can’t just dump 15,000 into a bank account from your parents and assume that will cover you.  There is certain criteria, while yes it can be used the bank want to see you have an ability to save on your own.
• Credit Score-  A tri-merge credit report used by the mortgage industry is the only credit report that can be used.  Just because the guy at the car dealer said you have great credit does not mean you do for a mortgage, the credit reporting is different.
• Credit Problems- It is not unusual for there to be mistakes on your credit report.  The time to fix them is before you put an offer on a house and apply for a mortgage, not while you are in escrow.
• Rental income- You can’t own another home and assume you can rent out the property and all of the rent will be applied to your income.  It’s more complicated than that

The difference between a mortgage pre-qualification and a pre-approval is verification of the information!

What can a good mortgage pre-approval do for you?

• Save you time-  Having a solid pre-approval, allows you to know exactly what price range you need to be in.  There has been more than one home buyer who has looked at homes for months without properly being pre-approved only to find out they are looking at homes $50,000 more than they can afford.  Talk about disappointment!!
• Save you money- Knowing exactly what is going on and understanding mortgage programs can save you money, instead of rushing around and trying to just get approved.  Also small adjustments can be made to your credit score very easily that can impact the interest rate you are charged.  Sometimes a 1 point difference in credit score can impact your interest rate by a ¼ of a percent.
• Give you confidence-  Knowing exactly how much you can afford and what a payment will be on a given house can help you move forward with confidence.   You should be able to determine within a few dollars what a home will cost you.
• Save you aggravation- There is nothing worse than finding a home you love, only to find out it is out of your price range or worse yet, you can’t be approved for a mortgage.
• Give you a negotiating edge- A seller always takes a risk when taking their home off the market for a home buyer.  They want to know the buyer can perform.  If you are a solid buyer it can help get you better terms.  Even in this market god home go quickly and can have buyers with competing offers.  It is not unusual for an agent to recommend a buyer’s offer for less money with great financing over a higher offer with weak, sketchy financing.  It could make the difference of getting a home or not!!

Hopefully you can see the great advantages to a good pre-approval letter.  Take the time up front and give yourself some piece of mind.

Where do you find a good mortgage lender?

If you are working with a real estate agent they are a good resource for service providers for you, including mortgage lenders.   If you haven’t found a real estate agent yet, try your local bank or ask friends for recommendations.

At the end of the day, work with a lender that takes the time and explains things to you and educates you about the process.  I have found the best mortgage brokers take the time to answer your questions, educate you about the process and are willing to give you time up front.

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