Denver Home Loan

Pre-Qualification

The terms "pre-qualification" and "pre-approval" are often used interchangeably.  I'll tell you at the outset that getting pre-APPROVED for a Denver home loan is definitely the way to go, but first let's take a look at pre-qualification. Here's how pre-qualification works. You call up a mortgage broker and provide your basic information including your annual income, years of employment, debts, money available for down payment and so on and so forth. The pre-qualification process is very informal. Your mortgage broker will take your word that the information you are providing is accurate and that there aren't any omissions of important information. There is no verification during the pre-qualification process. Because of the informality of the process and the fact that none of your information is actually verified, pre-qualification isn't worth much. In fact, a lot of the best real estate agents will not work with clients who are only pre-qualified because so many of these deals fall apart during the loan application process. Have you ever seen a "Sold" sign go up in your neighborhood only to be taken down a few weeks later? That often happens when a buyer was "pre-qualified," but the borrower was later turned down during the actual loan application process. Understandably, real estate agents don't want to drive all over the county showing you houses only to find out that you aren't a legitimate buyer. It's important to go through the pre-approval process so that your real estate agent will take you seriously as a buyer even if your agent doesn't require the pre-approval letter.

The problem with pre-qualification is that the information you provide to the mortgage broker might not hold up as well as you thought that it would. For example, if it is discovered that a significant amount of your salary is received as a bonus, that bonus may or may not be factored into your income by lenders. It's also common for borrowers to forget about a certain debt—a SeaDoo or motorcycle payment, for example. A lot of borrowers shoot from the hip when providing information about credit card debts and those too are often understated in the pre-qualification process. Another huge obstacle can be your credit score. You might think that you have "good" credit, but an error might show up in your credit report that you knew nothing about. If you received the money for your down payment as a gift from a relative, that too could present a problem if the money has been in your checking or savings account for less than 90 days. I could go on and on, but the long and short of it is that pre-qualification is just a best guess.

The only way to be reasonably certain that you will be approved for a loan is to get pre-APPROVED. It is a big mistake to go house shopping based on a pre-qualification letter. Any one of dozens of factors could result in your loan application being declined. You might have also spent weekend after weekend house hunting in the $400,000 range only to find out after you have struck a deal for a house at $395,000 that you are only qualified for $350,000. The reality is that shopping for a house based on a pre-qualification letter can result in disappointment and sometimes disaster. On the other hand, pre-qualification works out fine for a lot of people. If your employment is verifiable for at least two years, your credit spectacular and you have no debt or anything out of the ordinary, a pre-qualification phone call with a mortgage broker could work out fine. However, it's still not as good as being pre-approved because you lose a major negotiating chip. Here's how it works ...

Pre-Approval (You become like a CASH BUYER)

The most important thing that you can do before you start shopping for a new home is to obtain a pre-approval letter. Pre-approval allows you to shop with confidence, knowing how much house you can afford right out of the gate. Even better, a pre-approval letter is solid gold in the real estate market. A seller will be much more likely to accept your offer because they know that the loan process will go smoothly.

Getting pre-APPROVED can also save you money. Here's how it works. With your pre-approval letter in hand, you make an offer on a house for a few thousand below asking price. Another buyer offers asking price but that buyer isn't pre-approved. The seller's real estate agent encourages the seller to take the slightly lower offer, knowing how often buyers who aren't pre-approved can't go the distance. The seller accepts your offer, and you just saved a few thousand dollars, getting the house for less than what another buyer was willing to pay. When you are pre-approved sellers look at you as a CASH BUYER. A pre-approval letter gives you a lot of negotiating clout.

So what's entailed in getting pre-approved? Pre-approval differs from pre-qualification in that your financial information is actually verified. Your credit is pulled, your employment checked out, and you produce important documents such as pay stubs and tax returns. Your application is then submitted to an underwriter for approval.

If you are going to buy a house, you are going to have to go through this process anyway, so you may as well get it over with and have the added advantage of increasing your negotiating power and better knowing how much house you can afford. It also saves you from running around like a chicken with your head cut off trying to gather all of your documents at the last minute in order to meet the closing deadline. Pre-approval really is a win-win. Once you are pre-approved, you will receive a pre-approval letter which you can present to a potential seller when making an offer.

It's important to remember, though, that pre-approval does not guarantee that the lender will fund your loan. If the appraisal comes back too low or you muck up your credit after becoming pre-approved, for example, the lender might decline your application or charge a higher interest rate.