by Davey Edwards and Eric Kincheloe

Buying a home is often labeled as one of life’s most stressful events. Not only is a mortgage pre-approval a powerful tool, but it also can make your mortgage a nonevent in the home buying process.

What are the differences between a pre-approval and a prequalification? How can a  pre-approval make you a cash buyer and potentially save you thousands of dollars? How you may reduce the stress of the home buying process with a  pre-approval? And how can you gain the benefits of investigating various loan options through the  pre-approval process?

 Pre-approval vs. Prequalification
The first things we need to understand are the differences between a pre-approval and a prequalification.

Prequalification (the pre-qual)
Prequalifying before you start looking for a home gives you a general idea of the price range you can afford. The process involves a consumer authorizing the lender to pull a merged credit report from the three major credit bureaus. Some companies order only single bureau reports, however, and in some cases they do not order a credit report at all. It is important that you make sure your potential lender orders a full tri-merged credit report, because this is the best way to obtain an accurate credit profile. It can be incredibly risky to if the lender looks at only one of the bureaus, because not all credit information is provided to every major credit bureau. Loan prequalification does not typically include an in-depth look at your true ability to buy a home. It will not nail down an interest rate for you, and that factor and others affect the monthly payments a lender will allow you to make.

Prequalification also requires the buyer to provide relevant income and asset information that is not verified by documentation, which is a shortcoming of the pre-qual, because there may be income streams or assets that are not acceptable in the mortgage approval process. A good example of this situation could be estimating overtime income that does not have a consistent two-year history. The pre-qual relies on the consumer for providing information that can be skewed or flawed, depending on the questions that are asked. Use the prequalification for what it is, a general idea of what you can afford for your new home. Using this information cautiously can save you a lot of stress and disappointment.

Pre-approval
The pre-approval begins with a mortgage lender completing a full loan application. This process involves all of the following: obtaining a tri-merged credit report, documenting all acceptable income and assets, running the documented information through an automated approval system, and having the file approved by an underwriter for the lender. The only missing items from a mortgage pre-approval are the property, an appraisal, and an acceptable title search.

Cash Buyer
Sellers and their agents are the ones we need to “sell” our ability to buy a home from, because not only do we want to get the house of our dreams, but we also want to save money on that house. That’s right, save money on the house of your dreams simply by being pre-approved. Here’s an example: You have an automobile you need to sell. You are getting relocated for work, and you have a desire to sell it in a timely manner. You have a potential car buyer who comes to see you and offers you the full asking price for the car. The only hitch is that the prospect needs six weeks to get the loan. No big deal, right? Well, what if you wait six weeks and the person cannot get the loan? Now, what if you also have a buyer that offers you $250 less, but that person has already gone to the bank to get a pre-approval that says he or she is guaranteed a car loan that can close in a few days? Although $250 is a lot of money, a sold car is better than a car that still needs to be sold. The same concept works effectively when purchasing a home. You have a much better chance of negotiating a lower price on a home when you have the ability to waive the mortgage contingency along with your price offer. You also have a better chance of having your offer accepted over another buyer that does not have a pre-approval.

Reduce the Stress
The pre-approval can reduce some of the stress that goes along with having your mortgage financing secured before you make an offer to buy a home. One home buyer closed on his new home and had acquired a mortgage pre-approval prior to making an offer on the home that he was moving into the next day. One of the statements that he made was “Everyone told me this would be a lot more stressful than it has been, but this has been almost too easy.” Because he already had his financing in order, he was able to focus on all the other aspects associated with the real estate side of purchasing a home.

Evaluating Various Financing Options
New home buyers can also save thousands of dollars through a pre-approval by making sure the lender compares the benefits of several different types of loan programs. Because of the pressure to work fast, many new home buyers without a pre-approval might be given only one or two mortgage options from which to choose. Consider the fact that most mortgage lenders have many different loan products. It is important that you look at all your options, because a home is the largest purchase most consumers ever make.

Some good questions a mortgage lender might ask a buyer to help structure loan programs that best fit the needs of that consumer include the following:
? What is the best estimate for how long you might live in this home?
? Which of the following financial goals are a top priority for you: cash reserve, retirement, education, living comfortably on a fixed or a variable income, etc.?
? What is most important regarding your mortgage financing: maximum purchase price, targeted monthly payment, working within a specific budget for down payment and closing costs, maximizing tax benefits, or avoiding mortgage insurance?

These types of questions are helpful in helping you select a mortgage program that could not only get you the house of your dreams, but could also work as a financial tool that can save you thousands of dollars.
 
You want to be empowered when you buy a home. A pre-approval can help. Pre-approvals are free and are highly effective.

Davey Edwards and Eric Kincheloe are certified mortgage planning specialists and managers for Primary Residential Mortgage, Inc., in South Glastonbury, Connecticut. They can be reached at Davey@prmine.com and Eric@prmine.com or at 860-430-1845.