Prequalification and preapproval can smoothen your pathway toward buying your dream home at favorable terms. Want to know how? That’s what we talk about.
If you have been playing a certain video game for a long time, it will be easier to pass the different stages in it. Why? Because you will know all about what is going to happen, where the obstacles will appear, and how you can save yourself.
That is similar to when you go out in search of a new home. When you have decided to relocate, you would want the entire process to be spot on. From finding a preferred property, and obtaining the mortgage, to moving in, everything needs to be according to plan.
But it is usually not that simple if you are a first-time or new real estate buyer. Suppose you think that the only way to learn real estate dealings, like the video game, is to make multiple real estate investments.
The good news is you don’t have to do that and put so much of your money at risk. There are better ways to do so, and they are called prequalification and preapproval.
Practice makes perfect
Doesn’t matter who you are or what you do, practicing something can help you perfect it. As a real estate buyer, prequalification is the practice before you get into the actual process of securing a loan.
To be prequalified, the lender might have some questions to ask you about your financial status. This can help the lender assess your mortgage affordability and how much loan you will be able to pay back.
Some of the information that lenders would be interested in is your gross income, debts, credit score, tax returns, and employment history.
Before you head on over to open your drawers and search for the document to prove your claims, there is something you would want to know. The lender believes your claims and does not verify the documents yet.
Here, we have good news and not-so-good news. Let’s talk about the good news first. Since the lender does not verify the proofs, it is not a very time taking process.
With the good news done, here’s the not-so-good news. Since the lender does not verify the documents, you might not get an accurate result of the loan amount for which you are eligible.
But hey, you didn’t have any idea about the loan amount before. At least after prequalification, you have an idea of what to expect.
Yes, the lender will access your credit report, but that will be for non-lending purposes, called soft inquiries. That means your credit score will remain the same.
We have talked about the loan amount estimate from prequalification may not be very accurate. You can fix that by moving towards getting preapproved after you are prequalified.
This is where the lenders have a much more active role to play, as they will verify the document and cross-reference it with the responses you gave during prequalification. Some of the documents that the lender can ask for might include:
As the lenders have to verify each and every document, it can take a couple of months for you to be preapproved for a mortgage.
But look on the bright side. You will at least get a more accurate loan amount estimate as you did with prequalification.
Are you curiously seeing the documents which the lender may want, and your eyes are on “Credit report?” Yes, the lender does access and review your credit report. Unlike during prequalification, the lender looks for potential fraud and financial irregularities.
That makes it a hard inquiry, which can decrease your credit score. But there is no need to worry about it. This is only for a temporary period, as your credit will be back to where it was.
We have discussed what prequalification and preapproval can do by getting a loan estimate. Now let’s talk about how it can improve our negotiation capabilities with the home seller and lenders.
Being prequalified for a mortgage and having the preapproval letter in your hand can give you the upper hand while dealing with the home seller and lenders.
Here are some of the perks you can enjoy after being prequalified and preapproved for a mortgage.
One of the biggest concerns the lender have is that you, the borrower, will default on the loan. If that happens, the lender may suffer a massive financial dent. To mitigate the damage, lenders go for a higher interest rate.
But when you are prequalified and preapproved, the lender would have already verified that you can pay back the loan. This can reduce the lender's risk and give you a higher favorable interest rate. It can significantly reduce your monthly expenses.
Being pre-qualified and having the preapproval letter in your hand increases your reputation in front of the homebuyer. They would know you have gone through the documents verification process and are eligible to get the loan.
That might mean you will get priority over a potential home buyer who is not prequalified or approved.
The loan you obtain will come with various upfront costs like a down payment and closing costs. As you have developed an understanding with the lender, you can ask them to reduce the upfront payments as well.
Once you know the amount of money you need to save for the loan upfront cost, you can easily make a budget for it. In addition, you will have a lot of money remaining as well.
The real estate market can be a funny place. As you are on the search to find your preferred home, there are home sellers who are looking for preapproval sellers. Once they find such a buyer, they would want to close the deal with them.
After you are preapproved, you can have higher bargaining capabilities to seal the deal at your preferred rates.
Smartly negotiating with the food buyer can you a lot of money. If that is sorted and you are ready to obtain a mortgage, head on over to HAR.com and search for your dream house.
Subscribe to our monthly newsletter for up-to-date real estate industry trends, news, and insights.
Saved
