Get the Financing Before You Buy Home

It’s a home buyer’s nightmare. After much searching, you finally find the perfect house. You sign the purchase agreement and begin planning for life in your dream home, only to find out that you can’t qualify for the loan.

That kind of scenario is also a nightmare for any real estate agent or lender who has already invested considerable time and energy in your transaction. Fortunately, such situations are becoming increasingly rare, thanks to the growing popularity of loan pre-approval programs.

Today, most lenders strongly encourage prospective borrowers to secure the financing before they start shopping for a home. In doing so, the lenders are protecting their own best interests, as well as those of their customers. By saving time and eliminating costly problems, loan pre-approval enables lenders to work more efficiently and close loans more quickly. The faster a lender closes a loan, the higher loan volume it can handle. From a lender’s perspective, working with pre-approved buyers is good business, pure and simple.

What’s good for the lender is also good for the consumer. By enabling us to operate as efficiently as possible, loan pre-approval helps us hold down fees. And many lenders ask potential borrowers to pay for the appraisal and the credit check up-front. That is money wasted if you find out later that you do not qualify for financing.

Before we examine these facts in greater detail, it’s important to understand the difference between pre-qualifying and pre-approval. Pre-qualifying is simply a verbal exchange in which the lender tells you in advance approximately how much money you are able to borrow, based on your statement of debt and income. With a good credit history and a 10% to 20% down payment, you’re likely to qualify for some kind of loan if your monthly mortgage payment would not exceed 28% of your total income; and your entire monthly debt, including your mortgage, does not exceed 36% of total income.

Pre-approval goes a step further than pre-qualifying. It is an actual commitment to lend, provided that, when you are ready to buy, you still meet all the qualifying conditions that you met at the time of your conditional approval.

This conditional approval takes place at the time you submit a written loan application, in which you state your sources of income, employment and credit history. If you meet the underwriting guidelines, and if all of that financial information can be verified, the lender will grant the loan for the pre-approved amount. Most pre-approvals are valid for 60 days at the interest rate in effect at the time of commitment.

Lenders prefer to work with pre-approved buyers for one very simple reason: We don’t make money if the loan doesn’t fund. In fact, we end up losing money because, whenever a transaction falls through as a result of the buyer failing to qualify, all the time and resources we have invested in that application have been wasted. The more we know about a borrower up-front, the more willing we are to do business with them.

Here are some key ways that loan pre-approval works to the advantage of lenders:

We get a head start on the loan approval process. Loan approval requires the verification of every item on the borrower’s application--employment, sources of income, bank deposits, credit history and other financial information. It is essentially a matter of identifying the information we need, submitting a written request for it and waiting for a reply. This process can take days or weeks, depending on the complexity of the borrower’s financial situation. A loan for an individual who has income from many sources--stocks, annuities and retirement plans, for example--takes much longer to process than a mortgage for someone with a single bank account. Self-employed borrowers must provide past tax returns and profit and loss statements, which may require several meetings with their accountants.

Loan pre-approval allows the lender to begin verifying this financial information while the borrower is shopping for a home. This can save anywhere from three days to a week in total processing time, once the purchase agreement has been signed. The loan closes faster because most of the paperwork is already complete.

Pre-approved buyers are better educated about the lending process. Mortgage lending is an involved process. Few people outside our industry are familiar with it. With pre-approval, we can begin to educate our borrowers about what will occur and what kind of information will be expected of them. That makes for a smoother transaction for everyone involved.

We can catch credit problems early. Lenders know that borrowers are often uncomfortable discussing their credit problems up-front. But if a prospect has a credit problem, we need to know about it as soon as possible, before it undermines the entire transaction.

Many kinds of credit problems--a 30-day late on a credit card, or one late mortgage payment several years ago--probably won’t deter a borrower from qualifying, but they will have to be explained in writing. Researching and documenting these instances takes time, and the loan cannot close until they are fully resolved.

If the credit problem is serious, such as a recent bankruptcy or major default, it is unlikely that the borrower can qualify for any loan at all. Unpleasant as this reality may be, it’s easier for everyone involved to face it before the customer begins to shop at home.

Fortunately, what’s good for the lender is good for the real estate agent and borrower, too. Real estate agents prefer to work with pre-approved buyers for the same reasons we do--they require less time and they drastically reduce the possibility of a failed transaction. Remember, the real estate agent won’t make a commission if the loan doesn’t close.

Because you’ll know how much home you can afford, the real estate agent will know exactly which neighborhoods to show you, without wasting time on houses that are priced too high or too low.

Best of all, you won’t have to wait and worry about the loan approval process once you’ve found the home of your dreams. All that remains after you sign the purchase agreement is the appraisal of the property. When you get the financing before you find the home, everybody wins.