In many markets across the country, the number of buyers searching for their dream homes outnumbers the number of homes for sale. This has led to a competitive marketplace where buyers often need to stand out. One way to show that you are serious about buying your dream home is to get pre-qualified or pre-approved for a mortgage before starting your search.
Even if you are not in an incredibly competitive market, understanding your budget will give you the confidence of knowing whether or not your dream home is within your reach.
Freddie Mac lays out the advantages of pre-approval in the ‘My Home’ section of their website:
“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”
One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you through this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.”
Freddie Mac describes the ‘4 Cs’ that help determine the amount you will be qualified to borrow:
Bottom LineMany potential homebuyers overestimate the down payment and credit scores necessary to qualify for a mortgage. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so
Mortgage rates have mostly stabilized this month and are now essentially at the same point they were last spring, but that hasn't yet given a boost to home sales, which declined over the same period.
“Given that the economy remains on solid footing and weekly mortgage purchase application activity has been strong so far in 2019, we expect the decline in home sales to moderate or even reverse over the next couple of months,” says Sam Khater, Freddie Mac’s chief economist.
Freddie Mac reports the following national averages for mortgage rates in the week ending Jan. 24:
When you get pre-qualifed your lender pulls your credit and collects a few documents form you and gives you a pre-qualification letter that states you still have other financial qualifications to meet. Once you find a home you want to purchase, you must then write an offer with a financing contingency period (usually 21 days). During this time is when you meet the rest of your lenders requirements for obtaining a loan. You will be submitting the remaining required documents and meet any other requirements the lender asks of you. Your loan will then go though underwriting and you will wait for an approval. If you do not meet the requirements you are allowed to terminate your agreement with out penalty.
During these 21 days sellers are on pins and needles wondering if the deal will fall apart. Often times they do fall apart. This is why CASH is king...or was considered king. Sellers like cash deals for two reasons. One, they close quickly. There is no financing to work on. Only title has to be done, so they can close in about 7-10 days. Two, there is no financing contingency. So sellers don't have to worry about the deal falling apart. Cash deals 99% of the time will beat any offer, even a higher offer that is getting a loan. Sellers just don't want the risk of a deal falling apart with an offer that is getting a loan.
In mid Feb our spring market is about to begin. When spring market begins, all of the buyers come out of the woodwork. It is a buying frenzy. Inventory is low, and there are substantially more buyers. This creates for multiple offers. Multiple offers means biding wars. Biding wars increase your chance of competing against a cash buyer. The cash buyers usually win. If a buyer getting a loan, knows they are competing against a cash offer, they often times have to ante up a much higher purchase price to attempt to beat out the cash offer.
So if you can't pay cash, what do you do to make your more aggressive? You get approved PRIOR to to making an offer. This means you must get approved prior to even looking at homes. To get approved you will submit ALL of your documents and meet all the loan requirements before you do any thing else. The lender will then send your loan through underwriting and you will be returned with an approval if you meet the requirements. Your lender will give you an approval with the address of the property you are buying, "TBD", to be determined.
How does this make our offer more appealing to a seller? You can now write an offer with a 0 (zero) day financing contingency. Which means, you don't have a financing contingency at all. JUST LIKE A CASH OFFER. You also have the opportunity to close quickly, 10 days on average. JUST LIKE A CASH OFFER! You are now able to compete on the same playing field as a cash offer with out having to necessarily offer a higher purchase price to try to win that bidding war.
What if I am not in a bidding war, then how does this help me? If you are the only offer, the seller may now accept slightly less than he was willing to accept because you have such an aggressive offer. To the seller you basically have a cash offer. Your offer is fully approved.
I would highly suggest finding a lender who is familiar with this process and has the ability to offer it to you. I have a list of lenders who offer this. Please contact me if you need a referral.
Below is a list of all the documents required for a loan. I would begin to gather these and prepare to give them to your lender ASAP.
-Social Security Number(s)
-Address of past two years
-Names and addresses of each employer for past 2 years
-Past 2 years W2's
-Full month of recent pay stubs
-account names and numbers of all checking & savings acct's
-Last 3 banking statements from ALL accounts
-Addresses and loan info of all other real estate owned
-Bankruptcy, forclosure & divorce paperwork if applicable