I work with a lot of buyers. A lot, lot, lot
of ‘em. Many times I get calls from buyers (some first time, some not), and they want to start looking at houses right away. Yesterday even!
“Whoa there … slow your roll," I have to tell them. “We don’t know how much you can afford yet.” Often, they have a good idea, which sometimes is fairly accurate, other times not so much.
When you’re in the market to buy a home, you must first talk to a lender and get what’s called a pre-approval, or at least a pre-qualification letter. There is a difference between the two. Pre-qualification comes from the lender’s opinion—based on bare bones financial information from you—that you are credit worthy. Pre-approval means he’s got your financials, employment verification, tax returns, etc., and has determined that you are ready to go. Typically, I won’t put a buyer in my car until they’ve at least been pre-qualified. It just doesn’t make sense for us to waste time driving around when we don’t yet know if they can get a loan.
But what’s preferable is a pre-approval letter. When you have a pre-approval, you are essentially locked and loaded and ready to shop. Here are just some of the many benefits a buyer enjoys when they get pre-approved first.
- No wasting time looking at houses in the wrong price range. When you’ve been pre-approved, that means the lender has reviewed all of your documents, tax returns, pay stubs, etc., and has determined, based on your finances, how much you are putting down, how much you can budget per month and exactly what price point you should be shopping in. This can save you from heartbreak too. There’s nothing worse than falling in love with a $1,000,000 house and finding out you can only afford $750,000.
- Enjoy the confidence of knowing you are ready to pull the trigger. The pre-approval process can take a few days. Often, the lender will need documents that you may have to dig around for. Or perhaps you haven’t filed last year’s tax returns yet (side note: get on that!). When you begin looking at houses, having that pre-approval letter ready gives you the confidence of knowing that when you find that house that you’ve been dreaming of, you won’t lose it to another buyer while you’re in your garage digging for pay stubs from last year.
- A pre-approval letter gives a seller confidence in your ability to close the loan. In almost all situations, a seller won’t even review an offer that doesn’t come with a pre-qualification letter. But, if you can submit a pre-approval with your offer, you are giving the seller the confidence that you are a serious buyer who has done your homework, and that you will not have a problem down the road getting a loan. Your offer is going to be favored nine times out of 10.
- You can close faster when you’ve been pre-approved. Especially in today’s lending market, closing an escrow in 30 days is the exception rather than the rule, and the number one reason for that is delays on the lending side. Though one always likes to hope they can have it done in 30, it can often run over to 45 days or even longer. When you’ve already been pre-approved, you’re cutting out a lot of lag time in the loan approval process. As soon as your offer is accepted, your lender can get started getting an appraisal ordered and getting final underwriting approval.
Typically as a buyer you have a 17-day loan contingency (we’ve talked about contingencies here very recently). The sooner you can get that loan contingency released, the happier you and the seller will be, and you’ll be on your way to closing and becoming a home owner!
In other loan related news, homebuyers received really excellent news this week regarding jumbo conforming loan limits. In a 60-38 vote, the Senate approved an amendment to a spending bill that would restore the $729,750 ceiling that was first put in place in 2008 to allow Fannie Mae, Freddie Mac and the Federal Housing Administration to back what were previously considered "jumbo" mortgages not eligible for government support.
The limit had been increased in 2008 as a response to the housing crisis. It was extended several times but expired on Oct. 1, 2011. On Oct. 1, these elevated limits dropped to $625,500 from $729,750 in the most expensive neighborhoods. In each area, the cap dropped to 115 percent from 125 percent of the area's median home price.
Bob Nielsen, chairman of the National Association of Home Builders, applauded the Senate Friday morning and urged the House to reconsider their earlier rejection of the measure.
"Congress must act soon to ensure that this measure is enacted into law," Nielsen said. "Otherwise, the current drop in mortgage loan limits will reduce housing demand and place downward pressure on home prices in major markets. This will exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile economic recovery."
The measure is expected to go to the House later this year.
Jefferson Hendrick is an L.A.-based Realtor with Keller Williams. Contact him with questions, concerns and real estate inquiries at [email protected] or facebook.com/jeffersonhendrickrealtor.