In any housing market, especially a competitive one like we currently have in Seattle, a buyer needs to be well prepared to be successful. The most important step a buyer can take to get prepared for a home purchase is through getting approved for a home loan. This is important because a buyer needs know what they can afford and sellers need to know that the buyers are good for the money whether they are paying cash or getting a loan.
Assuming you are paying cash, the seller would need you to provide proof that the funds are liquid and available. An example of proving this would be through providing a copy of your bank statement or a letter from your financial advisor.
Now since most are not paying in cash, I thought I would discuss the different levels of home loan approval. Most buyers are not aware, but there are three different levels of getting approved for a loan, pre-qualification, pre-approval, and underwriting aka full credit approval.
Pre-Qualification
With pre-qualification, the buyer provides basic information to the loan officer. Information like place of work, salary, hourly wage, debts, credit score, down-payment, and how much their current housing costs. The loan officer will input the information into their system and a maximum loan amount the buyer potentially qualifies for will be spit out. The issue with pre-qualification is that none of the information is verified so the pre-qualification letter bares virtually no weight. Since the numbers are not verified, buyers should not attempt to use a pre-qualification letter to show sellers that they are qualified to buy a home. Sellers know that the numbers have not been checked and will generally not even consider an offer if it has a pre-qualification letter attached. The only time to get pre-qualified is if you are thinking about buying and are curious to find out how much, roughly, you qualify for. The process can take less than an hour.
Pre-Approval
Now getting pre-approved is quite similar to getting pre-qualified but the major difference is that the information is verified. So again, the buyer provides the lender with place of work, salary, hourly wage, etc. Not only is the information put into the system but this time it needs to be supported with proof. For example, the buyer’s credit report will be pulled showing their official score and all current debts. Proof of the down payment via a bank statement would need to be provided as well. While this is not full approval, since most of the information is verified, sellers will accept this as proof that the buyer can afford the home and can get a loan. The process of getting a pre-approval can take between one to three days. I would guess about 90% of serious and active homebuyers have been pre-approved.
Underwriting/Full Credit Approval
Getting underwritten means that you are getting fully approved for the loan. It is the highest level of approval a lender can give. The process takes about 7-10 days. The reason it takes much longer than the two levels of approval, mentioned above, is because the lender will fully vet the borrower’s financials. Not only will you provide all the items mentioned above but also tax information and complete bank statements. Proof of employment is also necessary. Everything that has to do with the borrower’s finances will be put under the microscope. Once you are underwritten, you are in the strongest position to write an offer because you have been fully approved for the loan already. When you are underwritten the lender is just waiting for you to give them the address once you get an offer accepted on a property. An offer that has a full loan approval letter attached is very strong. Ten out of ten times (assuming all other variables are constant) a buyer who is underwritten will have their offer accepted over an offer with a pre-approval letter. Being underwritten can give you a big edge in a competitive market since the majority of homebuyers are just pre-approved. I would say about only 5% of active and serious homebuyers are underwritten.
If you have any questions about pre-qualification, pre-approval, and/or underwriting, please feel free to contact me via email or phone. I strive to help my clients be as prepared as possible to be successful. I encourage all my buyers to be underwritten. I would be happy to help you through the process.
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