Mistake 7: Not Getting Preapproved for Your Home Loan
It's easy to fall into the trap of thinking you first find the house you want, and then you can start thinking about the loan process, especially if you've already taken care of your credit. However, it's not quite that simple.
It's a good idea to put yourself in a seller's shoes. As a seller, you may be taking in several bids and trying to cipher through and compare them; you may not base it solely on amount. Were you to accept a suspiciously high offer, the buyers may not be able to live up to their bid. Once the buyer actually goes through the loan application process, he may not get as much financing as he hoped, or promised. As the seller, you've already put a lot of time and effort into selling your home, and you'd like to finish things up without too much hassle and delay -- especially before those other, more legitimate-looking bids move on.
For these reasons, sellers prefer bids from prospective buyers who already are pre-qualified or pre-approved for a loan. Some sellers may refuse to consider you at all unless you've got a pre-approval letter from your lender. In addition, some realtors won't even show a property to a buyer without this pre-approval.
To understand what this entails, let's look at the difference between being pre-qualified and pre-approved:
- Pre-qualified: Although it's usually free, this process is very unofficial and sometimes unreliable. To become pre-qualified, you simply inform a lender of your own credit status, your income and assets, as well as your existing debt. Based on that information, the lender will give you a ballpark figure of what kind of loan they might offer you. Getting pre-qualified may give you some peace of mind regarding what you can afford. But because it's primarily based on your word alone, it won't mean much to a seller.
- Pre-approved: A pre-approval is more reliable and will consequently make you look more impressive to a seller. During the process, the lender actually verifies your financial and credit information. Based on this verified information, your loan officer will give you an idea of how much the bank will loan you. However, don't bet the farm on this figure either -- the lender isn't legally required to live up to it. The terms can depend on you taking up their offer within a specific period of time, or upon an inspection of the home you want to buy [source: Geffner].
Although getting pre-approved may require you to pay a fee, it may make the difference between getting the house you want or not. It can give you an edge ahead of another bidder's offer, which has no pre-approval behind it.
Now that you've done your homework and prepared yourself as an attractive buyer, remember that a house is a long-term investment and takes thinking ahead, which we'll talk about next.