It's a real estate professional's nightmare. You finally find the perfect buyer for that listing you've been trying to sell for months. The seller accepts the offer and then you find out that the buyer can't qualify for the loan.
This scenario is a nightmare for your disappointed client, the lender and REALTOR who has invested considerable time and energy in the transaction. Fortunately, such situations are becoming increasingly rare, thanks to the growing popularity of loan pre-approval programs.
Today, mortgage companies are strongly encouraging real estate brokers to recommend that buyers be pre-approved before they start shopping for a home. In doing so, lenders and brokers work together to protect everyone's interest and drastically reducing the likelihood of a failed transaction.
Before examining the benefits of loan pre-approval in greater detail, it is important to understand the difference between pre-qualifying and pre-approval.
Pre-qualifying is a verbal exchange in which the lender tells you in advance approximately how much money the buyer is able to borrow, based on a statement of debt and income. With a good credit history and a 10 to 20 percent down payment, most buyers are likely to qualify for a conventional home if their monthly mortgage payment does not exceed 28 percent of their total income. Also, if the potential buyer's entire monthly debt, including the mortgage, does not exceed 30 percent of total income. Some lender offer pre-qualifying certificates to borrowers; however, these documents are also approximations and are not commitments to lend.
Pre-approval goes a step further than pre-qualifying. It is an actual commitment to lend, provided that, when the borrower is ready to buy, he or she still meets all the qualifying conditions that were met at the time of conditional approval. This conditional approval takes the place at the time the borrower submits a written loan application stating sources of income, employment and credit history. If the borrower meets the underwriting guidelines, and if all of the financial information can be verified, the lender will grant the loan for the pre-approved amount.
Working for pre-approved buyers is good business for real estate professionals for one simple reason, when the sales contract is signed you have a much higher probability that the loan will close. Also, the sooner you can get the buyer involved in the process, the sooner the transaction will close.
Here are some other key advantages
of working with pre-approved buyers:
You may have better negotiating power with the seller. When given a choice between potential home-buyers, sellers are more likely to accept an offer from a buyer who has already secured financing.
Because you know how much home the buyers can afford, you can target which neighborhoods to show.
Pre-approval allows problems in a loan application to be addressed early.
Since loan approval requires verification of every item on a loan application, a pre-approved borrower can shop for a home while the lender simultaneously verifies financial information, saving anywhere from three days to several weeks in total processing time, once the purchase agreement has been signed.
In addition, pre-approved buyers are overall better educated about the lending process. The financing process can be intimidating to anyone, especially for first-time homeowners.
Pre-approvals are an excellent way for a REALTOR to provide superior service to their clients. Sellers won't wait for another buyer if a deals falls through, and the buyer won't wait and worry throughout the approval process. When the buyers get financing before they shop for a home, everybody wins.