Mortgage Prequalification: Yes, It’s A Big Deal
At first, the mortgage prequalification letter sounds as exciting as a new tax form. But the truth is very different. Prequalification can be a real money maker, something everyone buying a home should do.
Before we can talk about prequalification, we need to mention that people routinely talk about “prequalification letters” and “preapproval letters” interchangeably. Both of these terms are widely used, but there is no widespread agreement regarding what they mean.
Prequalification Vs. Preapproval
“Some lenders,” says the Consumer Financial Protection Bureau, “may use the word ‘prequalification,’ while other lenders may call the letter a ‘preapproval.’
In reality, lenders’ processes vary widely, and the words they use don’t tell you much about a particular lender’s process. The important thing is that the letter you receive provides enough information for sellers in your area to take it seriously.”
You want the lender to review your credit report, income and asset documentation, and approve you as a borrower. Whether it calls the process “preapproval” or “prequalification” doesn’t matter. But you need underwriters to look at your stuff and declare you approved, if the property meets the lender’s guidelines.
Benefits Of Mortgage Prequalification or Preapproval
The mortgage prequalification letter is a tool for making a real estate purchase offer. It shows the seller that you have spoken with a lender, and that you have a fairly good idea of what you can afford.
It’s even better if your lender has pulled your credit and verified your income. The more you do upfront, the less you have to worry about later.
This gives you an advantage in the bargaining process, because it assures the seller that you have the financial capacity to complete the transaction.
However, a mortgage prequalification letter is more than a bargaining tool. Done right, it can actually help you save both money and heartache.
Let’s imagine that before providing a mortgage prequalification letter, a loan officer asks for permission to review your credit report, bank statements, assets, liabilities, and pay stubs.
In this process, the loan officer may spot a problem that could sink your loan application. It might be an incorrect or out-of-date credit report item. As a result of the prequalification process, you correct the report and increase your FICO score.
With a better credit score, you might qualify for lower mortgage rate. If you get mistakes corrected before applying for a mortgage, the process will be less stressful because a possible delay will have been eliminated.
Is A Mortgage Prequalification Letter A Guarantee Of Financing?
Prequalification letters have one very important characteristic that cannot be overlooked. They’re not a full loan approval, and they don’t guarantee that you’ll get financing. They certainly don’t mean that the lender is prepared to give you a check in the morning.
This may seem somehow unfair, but if you think through the logic of it, you can see that a mortgage prequalification letter can never be a loan guarantee.
First, between the time a mortgage qualification letter is written and closing, several weeks or even months can transpire. (You’ll want to keep your loan file up-to-date by giving your loan officer new copies of your pay stubs and bank statements as they come in.)
It’s very possible that your credit score can change, and this may effect your ability to get financing. Because credit scores can change, it’s important to limit spending before settlement to avoid potential qualification problems.
Second, at the time a prequalification letter is written, you have not yet opened escrow, nor is there a property to appraise. Lenders base their loan decisions on the sale price of the property or the appraised value, whichever is lower.
You could change jobs or even lose a job, add to your credit card balances, or apply for new credit. (Please don’t apply for new credit.) Any of those things could change the whole picture and derail your loan approval.
Without a loan-to-value ratio based on the fair market value of the property, lenders are operating in the dark and cannot make a binding offer to finance.
Third — and sorry to bring this up — not everyone plays nicely. Lenders reserve the right to decline a loan if they find that the original information is incorrect or untrue.
We would all like to see a prequalification letter which says the lender is prepared to finance a $12 million property. While such a letter might feel good, it’s probably a negotiating mistake. Here’s why.
Let’s say that you qualify for a $600,000 mortgage. Let’s also say you want to purchase a home for which the seller is asking $450.000. If you offer $435,000 and provide a $600,000 mortgage prequalification letter, the seller may well reject the offer, knowing that you can afford more.
The better option is to provide a mortgage qualification letter saying you qualify for $435,000. This letter is factually true, but does not reveal your complete financial position.
The best way to use the prequalification process is to get a letter which does not tip your hand. After all, the seller only needs to know that you’re qualified – and no more. Your lender should be happy to prove letters for any amount you need, up to your maximum.
What Are Today’s Mortgage Rates?
Current mortgage rates should open doors for many buyers, because they are the lowest in 2017 or among the lowest, depending on the program. You can find the best mortgage rates available to you by comparing quotes from several competing mortgage companies.