THE REAL TRUTH IN LENDING…. The skinny on the preapproval

Lets get right down to business.  The first step of the home buying process: identifying the property you want to make an offer on, right?  WRONG.  The first step is GETTING PREAPPROVED.  Why get preapproved before you shop?  Well, there is the logical reason of needing to sort of know what you can afford before you go out there and shop.  Some of you may think you know what you can afford, but do you really?  Purchasing power depends on many variables independent of price.  For example, you may feel fairly confident that you can afford an $800k house in the Bronx, and you may be 100% right.  Does that mean you will be able to afford an $800k house in Westchester or Putnam?  Not necessarily.  Taxes in the Bronx for a property at this price point may hover around $6k per year.  Taxes in these northern counties for an $800k house will be upwards of $20k.  It’s critical to understand that taxes in our region are among the highest in the nation, and can be akin to paying a second mortgage.  You cannot determine purchasing power by analyzing the price alone.  You must consider taxes, interest rate, maintenance fees, among other things.  What’s another reason to get preapproved?  Well, you may feel fairly confident in what you can afford, taxes and all things considered, but how much will you get qualified for?  And yes, there is a BIG difference between what you can afford and what you will qualify for.  You must talk to a lending expert and have your documentation analyzed up front and your credit run to identify key issues that may thwart your efforts to purchase a home, and it’s better done sooner rather than later.  Maybe you are self employed and don’t make as much money on paper than you do in actuality because you don’t claim everything.  If your claiming negative income on your K-1’s, no bank is going to care that you really earned 6 figures that year according to you.  Even if it’s the truth.  If you do not have a paper trail to prove it – that is, if you have not claimed that with the IRS – they will not lend to you – period!  Maybe you just started a job a year and a half ago and are making a killing, but most of it is in overtime.  Well, most banks (perhaps all) will not consider overtime or bonus income if there is not at least a two year successive continuance.  This can mean that the income they will lend against is far less than your actual take home pay.  These are just a few examples of scenarios that can throw a serious monkey wrench into your debt to income ratio figures.  Additionally, it’s important to know what interest rate you will qualify at so that it, along with taxes, can be factored into the affordability equation.  And you won’t know the interest rate or even product type for which you will qualify until you speak with a mortgage professional.  Also, having your credit analyzed will shed light on some ghosts from the past that might come back to haunt you.  For example, that bankruptcy you had 6 years ago… or that collection from 2014…  yeah, those.  If it’s a bankruptcy, depending on how long ago it was filed, and what type of loan you are getting, you will not be able to secure a mortgage for several years.  Why wait until you find the home of your dreams and are ready to make an offer to find out whether or not you will be able to actually buy it?  It’s counter productive and wastes a lot of time, effort and mileage/gas.  Not to mention, you get your hopes dashed, and often those of your home buying partner, and it’s a major let down that can result in tears, fights and worse.

There’s another reason to not wait until you are ready to make an offer to get preapproved, and that is that you cannot even make an offer until you have a preapproval.  And why is that?  Let’s talk about it…

Ok, so if you had your home on the market, would you sign a contract with a buyer that provided no upfront evidence they could actually afford your home?  No not likely.  Why?  Because you would be effectively pulling yourself out of the game for a month or so, missing out on dozens of potential offers, waiting for a buyer’s financing to come through without any sort of initial assurance that it actually will.  So just as you would not be so foolish to accept an offer from a buyer that has not been vetted, neither will anyone else.…unless they are desperate…and in this market, that is very rare indeed.

So how long does it take to get preapproved?  And what is involved?  Well, it depends on the type of preapproval you are getting, and from which lender.  If you are contacting Chase or Bank of America and using one of their automaton/1-888-sales reps located in Dumbledorf, NE, it can probably take a week or more…if they even remember to get back to you.  And it’s usually merely a “pre-qualification” that gets issued.  Meaning, you’re preapproval is as good as the information you verbally provide.  Most listing agents are all too familiar with this type of preapproval, and they generally can find only one use for them – mainly as a substitute for toilet paper.  Another type of preapproval, as opposed to a pre-qualification the big bank will provide, generally involves a little more due diligence on the part of the loan officer by taking verbal data, but also running credit.  This is known as a sort of hybrid pre-qualification.  This approach is generally preferred over the aforementioned generic pre-qualification because it provides a more accurate picture of your debt to income ratio, at least the debt part is pretty much figured out.   If you know a local rep from one of those big banks and they are reputable, ambitious mover-shaker types rather than the waiting-to-collect-a-paycheck type (and yes, they do exist), this is the type of preapproval they often supply and it can usually take one business day or so to obtain, or at least it should.  Credit can be run in a matter of minutes.  Similarly, if you contact a loan officer from a smaller boutique bank that exclusively does mortgages, this type of preapproval can be generated in a day or less.  However, this type preapproval is quickly becoming a thing of the past.  It’s not as easy as it used to be to get a mortgage, and many deals fall through because the buyer is denied financing at the 11th hour…even after being preapproved.  This results in grossly disappointed sellers who will blame their agents, who will then set about maligning the loan officer and/or bank that issued the preapproval in the first place.  As a result, most loan officers worth their salt will collect some upfront documentation from you now prior to issuing their stamp of approval.  They will request the following: most recent 30 days paystubs, last 2 year’s W-2’s and last 60 days worth of bank statements.   A preapproval issued after a careful review of the aforenoted documentation AND a run of your credit is the second strongest preapproval you can possibly obtain, and is considered highly reliable by listing agents.  So what could be better than that?   What could be number 1?  The real estate marketplace is increasingly competitive and the mortgage industry is responding and ever-evolving accordingly.  I think in our region the buyer to inventory ratio is something like 6:1, with bidding wars prevailing in many towns.  The highest level preapproval is one that has been UNDERWRITTEN… that is, your documentation has been processed, reviewed and signed off on up front by an actual underwriter at the bank.  The underwriter, for those of you unfamiliar with the term, is basically the pope of the banking world.  They are the last word in whether or not the bank lends to you; they are the verdict maker, the emissary, the gatekeeper to the bank’s cash.  If they raise an eyebrow over so much as a missing punctuation mark, it can be another week before you get to the closing table.  So to get their blessing on the bank’s ability to lend to you upfront is VERY powerful, and having such a preapproval at your disposal when making offers will definitely set you apart from the pack.  Especially as we are seeing more and more cash buyers coming into the equation, underwritten preapprovals are increasingly becoming the norm.  When you’re up against cash offers, it’s not only your bid that must be strong, it’s your terms.  Sometimes, the only shot you may have at winning against cash is to waive your mortgage contingency.  Sounds awful risky, no?  Well, it’s a popular move in our region, particularly in the luxury market among the >20% down buyers.  And it is not as risky if you already are in possession of an underwriter’s blessing!   You basically have a commitment to lend in hand, the only missing piece being the appraisal of the property.  So if you are putting more than 20% down, or the home is a being sold under value, then this type of preapproval may enable you to waive your mortgage contingency and win the house.

So how long does it take to get an underwritten preapproval?  As you can imagine, it’s not always a one, two, three process to get an underwriter to review your documents and have a lender bang out such a preapproval for you.  The good news is that there are lenders out there that are responding to this increasing necessity for more competitive terms.  This has changed the game in the home buying market.  A loan officer will collect all your documentation after the first phone call and, within 6-8 business hours, give you a preapproval that has been reviewed by and received the blessing of an actual underwriter!  The challenge of course is that they are only as fast as you are at submitting your documentation.  So you need to be diligent about submitting a complete package in order to benefit from this process.

What is the take away?  Get preapproved before you go shopping.  It will save you the headache of having to scramble to get preapproved once you find the home of your dreams.  Too many buyers make the mistake of waiting to find the right home and then getting preapproved…and then losing the house to another buyer because they could not act quickly.  As you can see, it can take a couple of days, and in that time, that home may get snatched up while you are waiting to get qualified.  In this competitive market, you want to get preapproved early, and do it right.  Making sure you stand out from the pack with a nice, solid preapproval will give you a serious competitive edge.





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