Tuesday, March 31, 2009

The First Steps Series-Get Pre-Approved

Get Pre-approved for a Loan

Very few people buy a home with cash. According to the National Association of REALTORS® (NAR), nearly nine out of 10 buyers finance their purchase, which means that most all buyers -- especially first-time purchasers -- require a loan.

When it comes to financing, the real issue is not getting a loan (anyone willing to pay higher interest rates can find a mortgage), but getting the loan that provides a mortgage with the lowest cost and best terms.

Agents suggest that serious buyers start the mortgage process well before bidding on a home. By meeting with lenders and looking at loan options, you will find which programs best meet your needs and how much you can afford.

REALTORS® also recommend pre-approvals for another reason: Purchase forms often require buyers to apply for financing within a given time period, in many cases, seven to 10 days. By meeting with loan officers in advance and identifying mortgage programs, it won't be necessary to quickly find a lender, check credit, and rush into a financing decision that may not be the best option.

A pre-approval letter, unlike a pre-qualification letter, involves verification of your financial information. The lender will ask for documentation to confirm your employment, the source of your down payment and other aspects of your financial circumstances. Granted, a pre-approval is more time-consuming (and possibly more stressful) than a pre-qualification. The additional due diligence is exactly why the pre-approval carries more weight and shows your borrowing power.  You can visit as many lenders as you like and get several pre-approvals, but keep in mind that each one carries with it a new credit check, which will show up on future credit reports.

Although not a final loan commitment, the pre approval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. You'll have more leverage in negotiations with the seller. Sellers often prefer to negotiate with pre-approved buyers because the sellers know such buyers are financially qualified to obtain the financing they need to close the transaction. A pre-approval letter is an especially favorable point in situation where the seller is presented multiple offers.

Keep in mind, pre-approval letters aren't binding on the lender, are subject to an appraisal of the home you want to purchase and are time-sensitive. If your financial situation changes (e.g., you lose your job, lease a car or run up credit-card bills), interest rates rise or a specified expiration date passes, the lender will review your situation and recalculate your maximum mortgage amount accordingly.


How do you get pre-approval?

Real estate financing can be obtained from a number of sources, including banks, savings and loan, credit unions, mortgage companies, various government lenders and in some cases, individual REALTORS® themselves. Talk with several lenders before you decide. Your real estate broker will be familiar with lenders in the area and what they are offering. With their experience they can usually suggest lenders that have a variety of programs and competitive rates.

The loan officer will carefully review your financial situation, including your credit report and other information. The lender will then suggest programs which most-closely meet your needs.

This is also an opportunity to ask your lender about the following programs:

·      Government Loan Programs: FHA and VA offer loan programs particularly beneficial to low-and moderate-income individuals.

·      State and Local Housing Programs: Potential home buyers can familiarize themselves with a variety of state and local housing programs that offer additional benefits in their local area


For instance, a first-time buyer may qualify for state-backed mortgage programs with little money down and low interest rates, while a repeat purchaser (someone who has bought a home before) with more equity (money invested in the home) might want to get a 15-year loan and the lower overall interest costs it represents. Typically, first-time buyers opt for the traditional 30-year loan, with either a floating interest rate or a fixed rate of interest over the life of the loan.



  1. which banking institutions generally have better rates? credit unions or banks?

  2. In general credit unions tend to have better rates (on average ~0.12% lower than banking institutions)...and this is why:

    Banks and credit unions are the two most common sources of funding for mortgages. Although they function quite similarly, there are some key differences, particularly when comparing them in terms of being home loan lenders.

    Structure is the main concept that differentiates them. As where a bank is a private, for-profit company, a credit union is a not-for-profit organization run by its members.

    Because the credit union is not profit driven, any excess earnings go back to the members in the form of member services, dividends, or better interest rates.

    A bank, on the other hand, is profit-driven and its excess profits go to the stockholders.

    Since credit union profits generate better rates for its members, its mortgage rates tend to be lower than that of banks.

    However, not all credit unions are large enough or have the resources to provide mortgage loans or mortgage refinancing. On the other hand, large banks are equipped to handle these mortgage loan services, but may have higher interest rates.

    I recommend doing a little bit of research, checking with a number of different banks (and credit unions) to see which ones can provide the best rate and financing terms. In this type of market everyone is competing for your business.

    I can also suggest a couple of lenders to you if you'd like. Let me know if you have any questions.