April 28th, 2014
Before homebuyers hit the market to find a new home, they need to have their finances in order.
While securing financing prior to locating the perfect property may seem strange to some buyers, getting a preapproval could be the difference between whether they are able to close on the home or lose it to another buyer altogether. Sellers are more fond of buyers who have a preapproval, and buyers can have a clearer idea of what their spending power is.
What’s a preapproval?
Sometimes lenders advertise that borrowers can prequalify for a mortgage. However, this only means that they will ask a few questions about a buyer’s financial history and provide a rough estimate of the loan amount that could be obtained. A preapproval, however, provides a conditional agreement of financing for a certain amount.
Lenders will review a borrower’s financial history, including credit information, employment history and other details – much the same as actually applying for the loan. Based on those details, a buyer will be conditionally accepted or rejected for a loan. Eligible applicants will receive a letter noting the approval as well as the amount the lender is willing to offer.
How is this letter helpful?
With a preapproval letter in hand and a down payment amount known, buyers can shop for homes within their realistic price range. Rather than looking at a property, wanting to make an offer and then finding out a lender will only finance half the asking price, buyers with a preapproval can limit their search to only homes they can afford.
Preapprovals are also good in competitive buying markets. Although sellers likely have various offers, the highest bidders are only as credible as their ability to show proof of financing. Sellers typically aren’t fond of buyers who don’t know their spending potential and will likely not take an offer seriously without evidence of secure financing. A preapproval letter is tangible evidence of a loan amount and should accompany buyers at all times while home shopping.
Homes are flying off the market, as demand has sharply exceeded supply during the housing recovery. According to the National Association of Realtors, in March, the median time on the market for existing homes was 55 days, down from 62 days in both February 2014 and March 2013. As the spring selling season heats up, more buyers are returning to the market, and it is essential that buyers can remain competitive to land a home that they truly love.
Some buyers may not be ready to see what their financial history guarantees for a loan, but understanding price limitations can be less of a hassle than finding a suitable property only to discover that the right amount of financing is not available. Additionally, buyers who want to work with a real estate agent may not be able to get the help they need, as many homebuying professionals do not work with individuals who have not secured financing.
In the end, it’s worth the step to get the right home the first time, as not all homeowners get a home that they truly love. In fact, Redfin recently reported that 25 percent of homeowners would not purchase their home if they were given the option to decide again, according to the real estate marketplace’s survey of 2,000 U.S. adults conducted by Harris Poll. Rather than losing a nice property and settling on a more realistic home after gaining a clear understanding of their spending potential, buyers should get approval beforehand to find a worthy home for the right price.