Reader Question: I want to start looking for a home, but several people suggested agents won’t take me seriously without a pre-approval letter. I understand the pre-approval must be updated every 30 days, and a credit check hurts my credit score. How do I avoid being punished for planning ahead and beginning my search far in advance of the target move date? Thanks. Benjamin C.
Monty’s Answer: A pre-approval from a mortgage lender has gained more importance in real estate transactions than ever before. There are many reasons besides having agent confidence that reward you, not punish you, for making the effort toward mortgage loan pre-approval. It is a wise move to start your search early. You do not have to update your pre-approval status if your circumstances to not change, and the effects of a lender verifying your status while you shop for a mortgage will have little impact on your credit score. A formal loan application for a loan on the property you ultimately chose, subject to financing, is the only other time you will have to circle back.
Critical first step
Here are the key benefits of pre-qualification:
- you know in advance what you can afford
- you save time not looking in the wrong price range
- you get the lender’s perspective of the local marketplace
- your future agent will see your pre-approval as a positive sign you are serious
- A source of financing can influence the seller’s reaction to an offer
- it can lead to a more efficient and faster closing
- you learn about the financial alternatives available to you and have time to consider them
Lenders have different criteria in determining buying power so that pre-qualifying will go a long way toward a positive experience.
The lender needs to know
After you have been pre-qualified and found the right home, you will have to fill out an application and submit the information you initially collected, plus depending on when you buy, underwriting will most likely request updated and additional data.
Your financing source
There are many aspects to consider before you pick a lending source. Do an internet search for reviews on the lenders. Changes in government oversight of lending rules and procedures have stiffen and in many cases created an atmosphere where obtaining a home mortgage is more difficult. For example, late payments may result in higher interest rates. When choosing a source you should consider how competitive their rates are; the types of mortgages they offer, specifics on each loan, the cost to borrow and how they service their loans. Seemingly tiny differences can have a big effect on the cost or convenience of a loan product. Here is a starter list of questions to ask.
- What different types of mortgages do you offer?
- Do you sell the mortgage after you have originated it? If so, who services the loan going forward?
- Do you provide a written estimate of the monthly payments and a breakdown of the closing costs?
There are many other questions to ask that will appear as you proceed.
What to expect
The lending process can be confusing because loan officers will spend time and energy trying to convince you they are the best mortgage source. But when their underwriters spend even more time asking follow-up questions and challenging your application, it can be confusing. Conflicting signals are due to the complementary roles the loan origination (sales), and underwriting (risk control) functions play within the organization. Just being aware of the conflicting position may help in cutting down on the frustration it can cause.
Some quick tips
Mortgage lending is an extremely competitive field, and it will pay dividends to shop for a loan. You want lenders to compete for your business. In addition to banks and credit unions, mortgage brokers have many loan products and specialize in mortgage loans only. They are strictly commission based and work more like real estate agents.
Online mortgages are available and underwritten by some of the largest financial institutions in the country. VA mortgages are available for many veterans with no-down-payment required. There are many sources of loans that will reveal themselves when you utilize the tools available to seek them out.
A common error in lending happens after approval of the buyer’s loan. They buy a car before the closing! The lender rejects the closing because their circumstances have changed. This circumstance and others have killed many closings. Don’t let it happen to you.