One of the biggest fears a home seller has when accepting an offer is that they will enter a contract with a buyer, prepare to move, and then find out that the buyer cannot qualify for a loan.  In the past, sellers were more willing to accept a buyer with no evidence of loan pre-qualification.  In the past, sellers were so happy to receive an offer from a buyer that they were willing to take the risk that the buyer could not qualify for a loan just for the possibility of selling their home.

The market has changed. 

In today’s fast-paced and competitive real estate market, many sellers will not even consider a buyer who has not been at least pre-qualified for a loan.  However, getting pre-qualified is not enough.  You should be pre-approved for a loan before you start searching for a home. 

Pre-qualification vs. Pre-approval
The terms pre-qualification and pre-approval are often used interchangeably, but they are actually quite different. 

Pre-qualification simply means the lender has run a credit report and reviewed the loan application.  Based on these factors, the lender estimates what the buyer would qualify for without verifying all the information given by the borrower.  In practice, pre-qualification is only slightly better than not talking to a lender at all.  Many loans fall through even though the borrower has been pre-qualified.

Pre-approval is a different story.  Pre-approval means all the information has been verified and the lender has agreed to make the loan subject only to the title report and appraisal of the new property.  Pre-approval carries a lot more weight than pre-qualification and typically does not cause a purchase to fall through

When you get pre-approved first, the lender will give you a letter stating the loan amount that you are approved. When shown to a seller, the letter makes the seller feel more comfortable and will greatly strengthen your offer and negotiating position. 

It’s not always the highest price that gets the house
Buyers tend to believe that price is the most important part of the offer.  Price is very important to sellers, but it is only one piece of the offer.  The strength of the buyer is equally, if not more important in the eyes of a seller. 

From a seller’s standpoint, a perfect offer would be all cash with no contingencies.  However, most buyers can’t pay all cash and lenders definitely won’t loan money to a buyer until there is an accepted purchase contract. 

Pre-approval is the next best thing to all cash. 

Sellers are much more willing to negotiate with a buyer when the seller believes the buyer will be able to perform.  In fact, it is not uncommon for a lower offer to be accepted over a higher offer when the buyer is pre-approved for a loan and the other buyer is not.  What’s the good of accepting a higher offer if the buyer won’t be able to get the loan?  That is what the seller is concerned about when evaluating a buyer who is not pre-approved.

How do you get started?
Pre-approval can be accomplished in a matter of a week or two.  There are many ways you can go about doing this.  First of all, you can start online.  There are many good mortgage websites available that can help you get started including mortgage101.com and lendingtree.com. 

If you prefer to speak to someone in person, you can call a lender directly.  Most lenders will be happy to assist you and will provide this service for you for free and at no obligation.  In fact, be very wary of a lender who insists on charging you for this service or who somehow obligates you to use them  (If you would like to speak to a reputable lender, please contact me and I will refer you).

The bottom line is this:  Pre-approval is fairly simple to do, costs you nothing, and can greatly strengthen your negotiating position.  Do it ahead of time, it will make the home-hunting process much easier and more enjoyable.