March 16, 2009

FAQ from First-Time Home Buyers

Questions from First Time Home Buyers: What is the difference between being “Pre-Qualified” and “Pre-Approved” and does it matter when I make and offer?

Even in today’s buyer market, Sellers are more apt to negotiate with a Buyer who has a lender’s letter stating that they are a qualified buyer. Having a lender’s letter prepared and attached to the offer can save a buyer hundreds, if not, thousands, of dollars because Sellers know they are working with a buyer who really can purchase their home and therefore are more willing to negotiate on price and terms.

Pre-Qualify: When you meet the first time with a lender, you normally “pre-qualify” for a loan amount. This allows you to know what you can comfortably afford based on your income and credit scores. A Pre-Qualification Letter is more informal and allows the lender to review your current financial status so the lender can tell you the spending limits for any offers you make. This is an important first step that every buyer should do before they make their first visit to any home.

For all of us, getting pre-qualified makes us a little nervous because it is a little like judgment day! We often wonder if that car payment we missed two years ago will show up? Will my income be sufficient to buy a home I would like? How much paperwork will they need to see? The fact of the matter is that most lenders can do most of this work with the Buyer over the phone in 30 minutes or less! They may ask you to drop off certain paperwork but within a few days they can present you with a Pre-Qualification Letter so that you are now ready to really start looking at homes and able to make offers.

Pre-Approval: With the pre-qualification process done, you can now start to look for homes. As you spend time looking for homes the lender will continue to put together your financial information, verifying data that you have presented to them, and finalizing your loan so that they can present you with a “Pre-Approval” Letter. The Pre-Approval letter is the lender’s guarantee in writing that they can give you a loan. The Pre-Approval letter is a stronger signal to the Seller that you are a qualified buyer and is preferable to a pre-qualification letter when submitting offers. From the Seller’s point of view, if you have a pre-approval letter then you are considered a stronger buyer because you have already qualified and the Seller knows that you can close on the date you say you will close because the lender has said that they would give you a loan.

One last thing, you may qualify for more than you want to spend. Let’s say that you qualify for $175,000 home but the home you want is only $150,000. The lender would then prepare a letter that would attach to your offer for the $150,000 amount. As the Buyer, you don’t want to show all your cards - you are negotiating with the Seller so the lender may have to give you several letters over time as you make various offers on various properties.

Here are samples of two lender forms with the questions and information most lenders will need to know in order to approve your loan:

Sample Pre-Qual Form #1
Sample Pre-Qual Form #2

As always, we have lenders who our buyers have worked with and recommend. For a list of those lenders please e-mail me directly.

Posted By Steve Randall